Study of the Standard Relationship between the Money Supply and the Exchange Rate in Algeria during the Period (1990/2020)

Abstract

This study aims to examine the relationship between the money supply and the exchange rate in Algeria between 1990 and 2020. We analyze the economic conditions that characterized this period, including the shift from a directed economy to a market economy, as well as Algeria's participation in the International Monetary Fund and World Bank programs. To understand the impact of the exchange rate on the money supply in the short and long term, we utilize the Engel-Granger co-integration method. We employ (Auto Regressive Distributed Lag/ARDL) model to measure the relationship between the two variables. Our findings indicate that there is a statistically significant positive effect of the money supply on the exchange rate at a 1% significance level (P=0.001 < 0.01). The limits tests for co-integration through F-statistic also indicate co-integration between the exchange rate and money supply, aligning with economic theory. During the post-reform period (2000-2014), we observe that net foreign assets played a marginal role in covering the monetary mass compared to state and economy loans, which continuously increased, particularly since 2009. It is important to note that our study relies on comprehensive and reliable data from official sources that collect economic data in Algeria. Additionally, economic assumptions may impact our results and may not be applicable in all cases. Nonetheless, our study contributes to the existing literature on the relationship between the money supply and the exchange rate and sheds light on the specific case of Algeria.