Page 51 - Azerbaijan State University of Economics

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

Despite the high dimensionality (59 estimated coefficients), convergence was
adequately approached with interpretable dynamics. Two distinct regimes emerge:
Regime 1 reflects a low-volatility, sTable economic environment with an average
duration of 1.22 years, while Regime 2 corresponds to high-volatility or crisis
periods—averaging 5.5 years—often triggered by oil price shocks or pandemic-
related disruptions. The predominance of Regime 2 suggests that Algeria largely
operates in a structurally volatile setting. This is reinforced by the Markov transition
matrix, which shows a high probability of remaining in Regime 2 once entered (P22
≈ 0.82), highlighting the persistent and entrenched nature of Algeria's macroeconomic
instability and its critical implications for policy design.
Simple Switching Filtered/Smoothed Regime Probabilities
P(S(t)= 1) P(S(t)= 2)
1.0 1.0

0.8 0.8
0.6 0.6
0.4 0.4

0.2 0.2
0.0 0.0
02 04 06 08 10 12 14 16 18 20 22 02 04 06 08 10 12 14 16 18 20 22

Figure 4: Switching Regime Probabilities
Source: By author

Regime-Specific Dynamics: Intercepts and Exogenous Sensitivities
The regime-specific intercepts suggest distinct macroeconomic characteristics. In both
regimes, real GDP and public spending have significantly positive intercepts (z ≈ 4.5 and
2.1, respectively), consistent with trend-level growth and fiscal expansiveness. However,
inflation shows a sharp negative constant (≈ -495 to -500) across regimes, with large
standard errors, possibly reflecting baseline deflationary pressure absent shocks. The impact
of oil prices is most striking under regime 1, where it significantly influences inflation (z =
4.12), supporting a cost-push narrative during price surges. This contrasts regime 2, where
oil prices’ coefficients on all variables are weak and statistically insignificant (e.g., z = 0.12
on GDP). This suggests that in crisis settings, traditional oil-price channels are muted,
potentially due to price controls or the dominance of internal structural rigidities.

Across both regimes, lagged interactions reveal common yet informative dynamics.
Lagged GDP (LPIB(-1)) shows strong output inertia, with high significance in its own
equation (z ≈ 7.4). Lagged public spending (LDEP(-1)) exerts significant influence on
both GDP and inflation (z ≈ 7.39 and 2.14), indicating robust fiscal transmission,
particularly in the sTable regime.

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