Page 41 - Azerbaijan State University of Economics

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

These correlations suggest that an improvement in economic activity or an increase in
oil revenues would reduce unemployment.

Table 1: Linear correlation matrix
Unemp INFLA Exp GDP OIL_PRICE

Unemp 1
INFLATION -0.414 1
Exp -0.710 0.534 1
GDP -0.792 0.546 0.983 1
OIL_PRICE -0.726 0.440 0.480 0.522 1

Source: By author

In parallel, we note a very high correlation between public spending and real GDP
(0.983), indicating that these two variables evolve almost jointly, probably because
public investment is a key driver of economic growth in the Algerian context.
Moreover, public spending is moderately correlated with inflation (0.534), suggesting
that fiscal policy can generate price pressures, especially when it is expansive. The
positive relationship between inflation and GDP (0.546) may reflect a demand effect,
albeit a moderate one. Finally, the price of oil (OIL_PRICE) shows moderate positive
correlations with all the main economic variables, except unemployment. This reflects
the strategic importance of oil in the national economy: increases in oil prices support
budget revenues, public spending, and therefore overall economic activity. These
correlations, though informal, reinforce the relevance of a dynamic analysis using
VAR/SVAR models to better understand the structural interrelationships between
these variables.

Variable stationarity analysis
The results of the Augmented Dickey-Fuller (ADF) unit root test indicate that all the
variables - namely the unemployment rate (UNEMP), the inflation rate
(INFLATION), real public expenditure (EXP), real GDP (LPIB) and the oil price
(OIL_PRICE) - are not stationary in level, whatever the specification (with trend, with
intercept, or without any term). In fact, the test statistics obtained at levels are well
above the usual critical thresholds, which means that the null hypothesis of the
presence of a unit root cannot be rejected.

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