Page 34 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.82, # 2, 2025, pp. 32-60

Yet, it also navigated key opportunities to recalibrate its fiscal trajectory, particularly in
the post-2020 period when energy prices surged following the outbreak of war in Ukraine.
These developments accentuate the need to reassess the macroeconomic effectiveness of
fiscal policy, particularly through the lens of a structural econometric framework.

This study employs a Structural Vector Autoregressive (SVAR) model to explore the
transmission mechanisms of public spending on key macroeconomic variables in
Algeria — namely, GDP, inflation, unemployment, and public expenditure — while
accounting for the exogenous influence of international oil prices. Building upon
recent work by Zezza & Guarascio (2024), Cărăușu & Lupu (2023), and Matveev &
Sokolov (2024), this research not only contributes to the literature on fiscal policy
effectiveness but also offers practical insights for Algerian policymakers navigating
an era of heightened geopolitical and economic uncertainty.

Historically, numerous studies have explored the relationship between public spending and
economic growth. Keynesian theory, for example, suggests that an increase in government
spending can stimulate aggregate demand and, consequently, output and employment,
particularly in times of recession. However, other schools of thought warn of potential
crowding-out effects, where public spending could crowd out private investment, or
generate inflationary pressures if not managed prudently. The empirical literature on this
subject is vast, and results vary considerably depending on the countries, periods studied
and methodologies employed. For example, Afonso and Gonçalves (2020) examined fiscal
policy in the US and EMU, while Akpan and Atan (2015) analyzed the macroeconomic
effects of fiscal policy shocks in Nigeria, both using SVAR approaches. These studies
highlight the complexity of the relationship and the need for in-depth contextual analysis.

In the Algerian context, the period 2000-2023 is particularly relevant for such an
analysis. This period was marked by oil price boom and bust cycles, as well as
government efforts to diversify the economy and promote sustainable development.
Understanding how public spending interacted with these dynamics is essential for
formulating more resilient and effective economic policies in the future. The use of a
Structural Autoregressive Vector (SVAR) model is justified by its ability to identify
structural shocks and analyze their dynamic effects on macroeconomic variables, thus
offering a more nuanced perspective than traditional models which do not distinguish
between structural and reduced shocks (Amisano & Giannini, 1997). This approach
will make it possible to decompose shocks and assess the specific impact of public
spending on GDP, inflation and unemployment in Algeria, taking into account the
specificity of its rentier economy. This study will thus contribute to the existing
literature by providing empirical evidence specific to the Algerian case, which is
crucial for policymakers seeking to optimize resource allocation and promote sTable,
inclusive economic growth.

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