Page 53 - Azerbaijan State University of Economics

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

The practical implication is clear: fiscal stimulus proves more effective during sTable
periods but loses traction under volatility, reinforcing the need for counter-cyclical buffers
and automatic stabilizers in resource-dependent economies (Batini et al., 2014). The
regime-dependent dynamics revealed by the MS-VAR model yield several policy-relevant
insights. First, Algeria’s persistence in high-volatility regimes (P22 = 0.82) underscores
deep macroeconomic fragilities tied to external shocks and commodity cycles. Second, the
asymmetric role of oil in regime 2 suggests that fiscal effectiveness depends not only on oil
price levels but also on institutional responses to windfalls. Third, the inflation–
unemployment trade-off becomes more pronounced during crises, pointing to a stronger
Phillips curve effect and the need for coordinated fiscal and monetary policies. Finally, the
results highlight the urgency of adaptive fiscal frameworks—anchored in commodity price
benchmarks or structural balance rules (IMF, 2020)—to navigate regime shifts effectively.
These findings resonate with broader evidence from emerging markets (e.g., Caporale et
al., 2010), where ignoring non-linearities often leads to policy miscalibration.

DISCUSSION
The aim of the study was to analyze the dynamic impact of public spending on Algerian
economic performance over the period 2000-2023, using a Structural Autoregressive
Vector (SVAR) model. The expected results, as described in the report's executive
summary, predict a positive impact of public spending on real Gross Domestic Product
(GDP) in the short term, potential inflationary pressures, a reduction in unemployment in
response to targeted spending, and a marked sensitivity of the Algerian economy to oil price
shocks. These forecasts are consistent with the rentier nature of the Algerian economy,
which is heavily dependent on oil revenues, which finance a significant proportion of
government spending. Application of the SVAR model has enabled us to identify
exogenous structural shocks and analyze their effects on key endogenous variables,
providing a nuanced understanding of transmission mechanisms. Impulse response
functions (IRFs) and variance decomposition (VD) are essential tools for visualizing the
trajectory of variables in response to shocks and quantifying the proportion of forecast error
variance explained by shocks to other variables (Martin et al., 2013).

Although the specific results of IRF and variance decomposition are not explicitly detailed
in the sections provided in the report, the methodological framework clearly indicates the
intention to quantify these impacts. The central hypothesis is that public spending,
particularly that financed by oil revenues, acts as a lever to stimulate economic activity.
However, this stimulation can be accompanied by challenges, notably in terms of price
stability and managing the volatility associated with oil prices. The SVAR model's ability
to distinguish structural shocks from reduced shocks (Amisano & Giannini, 1997) is crucial
in isolating the effect of public spending from other macroeconomic factors. This approach

53