Page 33 - Azerbaijan State University of Economics

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

Keywords: Public expenditure; Economic growth; SVAR; Oil price; Fiscal policy

JEL Codes: E62; C32; O55; Q43

INTRODUCTION
The relationship between public expenditure and economic performance remains a
cornerstone of macroeconomic inquiry, particularly for resource-dependent and
developing economies. Governments frequently resort to fiscal tools not only to
stabilize the business cycle but also to support long-term development objectives,
especially in economies that exhibit structural vulnerabilities (Perotti, 2005; Fragetta
& Melina, 2011). In rentier states such as Algeria, public expenditure is both a driver
of aggregate demand and a vehicle for distributing hydrocarbon rents, reinforcing its
centrality in shaping economic trajectories (Chellai, 2021; Daoudi, 2023).

The theoretical foundations of fiscal policy's impact trace back to Keynesian economics,
which advocates expansionary fiscal policy during economic downturns to stimulate
output and reduce unemployment. More recent frameworks, including New Keynesian
and post-Keynesian models, emphasize the role of fiscal multipliers and automatic
stabilizers, especially when monetary policy space is limited (Auerbach &
Gorodnichenko, 2012). However, contemporary research underscores that the long-run
effects and overall efficacy of government spending are critically dependent on the
efficiency of public expenditure and the presence of sound fiscal rules (Apeti, Bambe, &
Combes, 2025; Antolin-Diaz & Surico, 2025). Structural VAR (SVAR) models have
emerged as indispensable tools in this context, enabling researchers to isolate and identify
fiscal shocks while accounting for the endogenous structure of the economy (Amisano &
Giannini, 1997; Lütkepohl & Velinov, 2016). This methodology is widely applied in
contemporary literature to assess the impact of budget expenditures on GDP dynamics
across various economic contexts (Matveev & Sokolov, 2024).

The COVID-19 pandemic and subsequent geopolitical crises — notably the 2022 Russia–
Ukraine conflict — have reshaped the global economic order, revealing the fragility of
global supply chains and the asymmetries in fiscal capacity across nations (Fernandes,
2020; Bakar & Rosbi, 2020). These shocks underscore the urgency of re-examining the
resilience of public finance systems in countries like Algeria, where fiscal space is closely
tied to oil and gas exports. This global context has amplified the focus on how fiscal
policy, particularly public investment, can be engineered to foster structural economic
change and enhance regional resilience (Zezza & Guarascio, 2024).

In this light, Algeria presents a compelling case for empirical exploration. Between
2000 and 2023, the Algerian economy experienced substantial volatility due to
exogenous oil price shocks, global crises, and domestic structural constraints.

33