Page 46 - Azerbaijan State University of Economics

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

Response to Cholesky One S.D. (d.f. adjusted) Innovations
95% CI using analytic asymptotic S.E.s
Response of GDP to Exp Innovation Response of Exp to Exp Innovation

.016
.024
.012 .020
.016
.008
.012
.004 .008
.004
.000
.000
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Response of INFLATION to Exp Innovation Response of Unemp to Exp Innovation

.75
.8
.50
.6
.25
.4
.00
.2
-.25
.0
-.50
-.2
-.75
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Figure 2: Impulse response function graphs
Source: By author

For inflation and unemployment, the responses are also significant. Inflation rises
immediately after the shock, peaking around period 4 (0.2062), before declining
slowly, indicating that public spending generates temporary inflationary pressures,
probably due to an increase in demand without a proportional increase in supply. The
unemployment rate, meanwhile, reacts strongly from the first period (0.1852), with a
maximum response in period 3 (0.4335), before gradually decreasing. This suggests a
positive effect on employment, but also a temporary one. This dynamic reflects the
structure of the Algerian labor market, which is highly dependent on public
recruitment and sensitive to cyclical policies, with no lasting long-term effects in the
absence of structural reforms.

Variance decomposition
The variance decomposition of real GDP shows that, although it is initially entirely
self-explanatory in the first period (100%), its evolution rapidly becomes influenced
by other variables. By the second period, government spending explains around 1.1%

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