If you are interested in the economic situation of Algeria, you may want to know how its exchange rate regime works and what it means for its monetary policy and economic stability.
What is an exchange rate regime?
An exchange rate regime is the way a country manages its currency in relation to other currencies. There are different types of exchange rate regimes, ranging from fixed to flexible. A fixed exchange rate regime means that the country pegs its currency to another currency or a basket of currencies, and maintains it within a narrow range. A flexible exchange rate regime means that the country lets its currency float freely according to market forces, without any intervention.
Why does it matter?
The choice of an exchange rate regime has important implications for a country’s monetary policy and economic stability. A fixed exchange rate regime can provide stability and credibility, but it also limits the country’s ability to use monetary policy to respond to shocks and adjust to external imbalances. A flexible exchange rate regime can provide more flexibility and autonomy, but it also exposes the country to exchange rate volatility and speculation.
What is Algeria’s exchange rate regime?
Algeria has officially adopted a managed floating exchange rate regime since 1994, which means that it allows its currency, the dinar, to fluctuate within a certain range, but intervenes occasionally to smooth out excessive fluctuations. However, Algeria also has a parallel exchange market, where the dinar trades at a higher rate than the official one. This market reflects the supply and demand of foreign currency in the informal sector, which accounts for a large share of the economy.
How can we measure Algeria’s exchange rate regime?
To measure Algeria’s exchange rate regime more accurately, we need to take into account both the official and the parallel exchange rates. A recent academic article1 does this by using data from August 2014 to July 2018 and following the methodology of Reinhart & Rogoff (2004), who classify exchange rate regimes based on their degree of flexibility and their anchor currency.
What do they find?
The authors find that Algeria’s exchange rate regime was a de facto crawling band that is narrower than or equal to ± 2 % around the EURO during the period of study. This means that Algeria maintained its dinar within a very tight range around the EURO, both in the official and the parallel markets. This finding differs from the official classification of Algeria as a managed floater, and suggests that Algeria was more committed to stabilizing its exchange rate than its inflation.
What are the implications?
The authors discuss some implications of their finding for Algeria’s monetary policy and economic stability. They argue that Algeria’s exchange rate regime was too rigid and did not allow enough flexibility to cope with external shocks, such as the decline in oil prices since 2014. They also suggest that Algeria should consider adopting a more flexible exchange rate regime, along with other reforms, such as diversifying its economy, improving its fiscal policy, and enhancing its institutional quality.
Conclusion
In this blog post, we have summarized a recent academic article1 that examines Algeria’s exchange rate regime from August 2014 to July 2018. The article finds that Algeria’s exchange regime was a de facto crawling band that is narrower than or equal to ± 2 % around the EURO. This finding has important implications for Algeria’s monetary policy and economic stability.
We hope you found this blog post informative and interesting. If you want to learn more about this topic, you can read the full article1 or check out other articles from Les Cahiers du Cread2, a quarterly economic review publishing original findings of empirical research and theoretical debates on fields pertaining to macroeconomics, industrial economics and firms, human development and social economics, agriculture and environment.