Oil Rents, Fiscal Dominance and Monetary Dynamics in Algeria: A Stock-Flow Consistent Approach

This paper presents a Stock-Flow Consistent (SFC) macroeconomic model that's specifically designed to reflect the unique institutional and structural features of the Algerian economy. It incorporates key elements like oil rents, government spending behaviors, money creation from within the system, and the financial relationships among the government, banks, the central bank, and the foreign sector. By using data from Algeria spanning from 1990 to 2025, the study explores how fluctuations in oil revenue influence fiscal dynamics, monetary policy, and the overall stability of the economy. The simulation results bring forth three main insights. Firstly, Algeria's economic growth continues to be heavily reliant on oil, with fiscal policy serving as the main link between global oil markets and local economic activity. Secondly, the economy seems to function under a long-standing situation of fiscal dominance, where monetary conditions are driven by the government's need for financing, rather than any independent monetary policy goals. Thirdly, shocks in oil prices affect fiscal balances, liquidity creation, and the external account all at once, leading to significant vulnerabilities in growth volatility, inflation, and reserve depletion. Looking at alternative scenarios, the findings indicate that cutting back on deficit monetization and encouraging economic diversification could greatly enhance overall stability, but these improvements come with notable trade-offs between maintaining monetary stability and managing public debt. In summary, this paper argues that Algeria's macroeconomic instability isn't just caused by external oil shocks; rather, it's a result of deeply rooted fiscal-monetary relationships within a growth model reliant on rents. The SFC framework sheds light on policy insights that traditional macroeconomic models often miss.