A DSGE Model for the Algerian Economy: Oil Dependence, Fiscal Dominance, and Macroeconomic Dynamic

This paper develops and estimates a Dynamic Stochastic General Equilibrium (DSGE) model tailored to the structural characteristics of the Algerian economy. The framework explicitly distinguishes between the non-oil production sector and an exogenous oil sector that generates volatile export revenues and fiscal resources. Households optimize consumption, labor supply, and savings under habit formation, while firms operate under monopolistic competition with nominal price rigidities. The model incorporates a government sector with a fiscal rule linked to oil revenues, a constrained monetary policy rule, and a small open economy external sector featuring oil and non-oil trade flows and exchange rate dynamics. Using calibrated and estimated parameters based on Algerian macroeconomic data, the model is employed to analyze the transmission of oil price, fiscal, and monetary shocks. The results highlight the dominant role of oil revenues in driving macroeconomic fluctuations and fiscal outcomes, as well as the limited effectiveness of conventional monetary policy instruments in the presence of fiscal dominance and external shocks. Fiscal policy emerges as the primary stabilization tool, while oil price volatility significantly amplifies output and consumption dynamics. Overall, the model provides a coherent quantitative framework for assessing macroeconomic policy trade-offs in oil-exporting economies and offers insights relevant for the design of fiscal and monetary policies in Algeria.