Comparing the Relationship Between Nominal and Real Effective Exchange Rates During the Last Two Devaluations in Algeria

Abstract

This article examines the impact of nominal effective exchange rate on real effective exchange rate in Algeria, using autoregressive distributed lag bounds test approach with monthly time series data from 2008 to 2017. Empirical results suggest that the nominal devaluation leads to real devaluation not only in the long run but also in the short run in Algeria for both devaluations. But all coefficients estimated for the second devaluation are low compared to the first devaluation. Our analysis shows that reducing the import through devaluation of the dinar led to a significant increase in import prices. However, the present study shows that taking into account all of the structural problems of the Algerian economy, the devaluation of the dinar may lead to more severe inflation than anticipated by the Algerian government.