Page 39 - Azerbaijan State University of Economics

Fatih Chellai: Regime-Dependent Effects of Public Spending in Algeria: A Structural VAR and
Markov-Switching Approach

Estimation and identification procedure
The SVAR model estimation and identification procedure will follow a structured
approach: First, stationarity will be tested using unit root tests (e.g., ADF), with
differencing applied if necessary. Next, the optimal lag length ( ) will be selected
using information criteria (AIC, BIC, or HQ), followed by the estimation of the
reduced-form VAR model via OLS. Structural shocks will then be identified by
imposing restrictions on the contemporaneous ( ) or long-term impact matrix,
drawing on economic theory and Algeria-specific conditions—such as assuming
public spending shocks do not instantly affect GDP or treating oil price shocks as
exogenous. Cholesky restrictions will be explored initially, with alternative schemes
considered for robustness. Subsequently, impulse response functions (IRFs) will
analyze dynamic responses to shocks, complemented by variance decomposition
(VD) to quantify each shock’s contribution to forecast error variance. This
methodology will elucidate the dynamics of public spending’s impact in Algeria,
offering insights for economic policy formulation.

RESULTS
This section presents and analyzes the main empirical results from the estimation of
the SVAR model applied to the Algerian economy over the period 2000-2023. The
aim is to assess the dynamics of interactions between public spending, real GDP,
inflation and unemployment, while taking into account the exogenous influence of oil
prices. After checking the statistical properties of the series and identifying the
optimal structure of the model, we successively present the results of the diagnostic
tests, the impulse response functions and the variance decomposition, in order to better
understand the transmission channels of fiscal shocks and their impact on
macroeconomic equilibria.

Descriptive data analysis
Over the period 2000-2023, the data reveal continuous growth in Algeria's real GDP,
rising from 4,454 billion dinars in 2000 to over 8,726 billion in 2023. This growth,
although steady, appears to be strongly correlated with the evolution of oil prices,
which have gone through marked cycles. The spectacular rise in oil prices between
2003 and 2008 (from 28.85 to 96.94 USD) coincided with an acceleration in GDP,
supported by the expansion in oil revenues. After a period of stabilization between
2011 and 2014 at around 100 USD per barrel, a sharp fall was observed in 2015 (52.32
USD), moderately impacting growth, without reversing it. It should be noted that
public spending followed a continuous upward trend, rising from around 20 billion to
over 44 billion, reflecting an expansionary fiscal policy, probably to support demand
and cushion external shocks linked to the volatility of oil revenues.

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