Interaction between monetary and fiscal policy in Algeria: An application of a model with Markovian regime switching

Abstract

The aim of this paper is to analyze the dynamic interaction between monetary and fiscal policies in Algeria for the period 1963-2017. First, we examined the nature of fiscal policies in Algeria using a Structural vector Autoregression model. The results provide evidence
of a non-Ricardian fiscal policy in Algeria (validity of the fiscal theory of the price level). Further, the paper analyzes the interactions
between monetary and fiscal policies by applying a State-space model with Markov-switching to estimate the time-varying parameters of the relationship. The evidence indicates that monetary and fiscal policies in Algeria have interacted in a counteractive manner for most of the sample period. With these results, we identify a game where the fiscal authority plays first (or it is active) while the  monetary authority have a passive behavior determining the debt levels to the prices given by the fiscal policy. This is favorable to the fiscal dominance.

Keywords:  Monetary-fiscal policy; Interaction; Dominant regime; Markov switching estimation; Algeria.