Estimating the Equilibrium Real Exchange Rate in Algeria during the period: 1980-2015

Samir AIT YAHIA¹, Tarek DJEDDI^2, and Tayeb LOUAFI¹

¹Larbi Tebessi University, Tebessa, Algeria

²ENSSEA ex. INPS, Kolea, Algeria

Cite this paper:
Samir AIT YAHIA, Tarek DJEDDI and Tayeb LOUAFI. Estimating the Equilibrium Real Exchange Rate in Algeria during the period: 1980-2015. Journal of Finance and Economics. 2017; 5(5):211-218. doi: 10.12691/jfe-5-5-3

Abstract

The aim of this paper is to estimate the long-run Equilibrium Real Exchange Rate (ERER) path using VECM approach, and assesses the degree of misalignment in Algeria. Based on annual data from 1980 to 2015, our results show that the macroeconomic variables such as terms of trade, trade openness, differential productivity with trading partners (Balassa-Samuelson effect), real price of oil, and government expenditures, plays significant role in determining the equilibrium of Algeria’s ERER, the results also reveal that Algerian economy suffered from RER misalignment. As finding, and according to the Edwards’ [6] Model and the Cashin’s [2] model, results showed same evidences that there are three episodes of undervaluation of the Algerian dinar’s and also three episodes of overvaluation, the seventh episode (2004-2015) shows that the Actual ERER appears to have been close to its estimated equilibrium.

Keywords:
equilibrium real exchange rate misalignment error correction mechanism dinar Algeria

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