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

of GDP variance, while inflation explains over 7%. Over the 10-period horizon,
almost 48% of GDP variation is attributed to other variables, including 28.7% to
public spending, confirming their significant role in growth dynamics in Algeria, a
country where public spending is a major lever of economic intervention. This
supports the idea of a substantial fiscal multiplier and validates the hypothesis that
government spending policies have a structuring effect on economic activity.

As regards the variance decomposition of government spending (EXP), we observe that it
is mainly self-explanatory at the outset (over 99% in the first period), but its dependence on
GDP and other variables increases over time. By the tenth period, around 25% of the
variation in public spending is explained by other variables, mainly unemployment (9.3%)
and inflation (14.1%). This result can be interpreted as a partial reactivity of public spending
to the business cycle, reflecting a budgetary behavior influenced by social (unemployment)
and economic (inflation) pressures, but retaining a large degree of autonomy. This profile
reflects the Algerian government's budgetary stance, which is often proactive but also
constrained by external factors such as price stability and the labor market.
Variance Decomposition of GDP Variance Decomposition of Exp
100 100

80 80
60 60

40 40
20 20

0 0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

GDP Exp
INFLATION Unemp
Variance Decomposition of INFLATION Variance Decomposition of Unemp

100 100
80 80

60 60
40 40

20 20

0 0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Figure 3: Variance decomposition using the Cholesky decomposition (adjusted for
degrees of freedom)
Source: By author

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