The Impact of Monetary Policy on the Inflation Rate in Algeria after Corona Pandemic (COVID-19)

Abstract

This study examines the dynamic relationship between monetary policy and inflation in Algeria during the period 2018–2023, with particular attention to the post-COVID-19 period. The analysis is based on monthly macroeconomic data covering inflation, policy interest rates, money supply (M2), exchange rate movements, oil prices, and COVID-19-related shocks, obtained from the Bank of Algeria, the National Office of Statistics, and the IMF International Financial Statistics. To investigate the monetary transmission mechanism, the study employs a Vector Autoregression (VAR) model complemented by Augmented Dickey-Fuller (ADF) unit root tests, Bai–Perron structural break analysis, Granger causality tests, impulse response functions (IRFs), and forecast error variance decomposition (FEVD). This econometric framework allows for capturing dynamic interdependencies among variables and potential structural changes induced by the COVID-19 pandemic and external shocks. The empirical results indicate that inflation in Algeria exhibits strong persistence and is significantly influenced by monetary and external factors. Money supply growth and exchange rate depreciation exert a positive and statistically significant effect on inflation, while the policy interest rate shows a negative but relatively limited impact, reflecting the weak transmission of the interest rate channel in a bank-based and structurally constrained financial system. Structural break tests confirm significant regime shifts during the COVID-19 period, highlighting a change in the monetary policy transmission mechanism. Furthermore, oil price shocks and pandemic-related disturbances are found to play an important role in explaining inflation dynamics, as evidenced by variance decomposition results. Overall, the findings suggest that inflation dynamics in Algeria are driven by a combination of domestic monetary conditions and external shocks, particularly in the context of a managed exchange rate regime and high dependence on hydrocarbon revenues. The study highlights the importance of a coordinated monetary and exchange rate policy framework to enhance macroeconomic stability in emerging oil-dependent economies.