The Role of Quantitative Monetary Policy Tools in Achieving Monetary Stability in Algeria (1990–2022)

Abstract

This study examines the impact of quantitative monetary policy tools on monetary stability in Algeria during the period 1990–2022. Using annual time-series data, the research applies the Augmented Dickey-Fuller unit root test, Granger causality test, and a Vector Autoregressive (VAR) model to analyze the relationships between money supply (M2), inflation, the discount rate, and the official exchange rate. The empirical results reveal a bidirectional causal relationship between money supply and inflation, while no causal relationship is found between money supply and either the discount rate or the exchange rate. VAR estimates indicate that money supply is mainly influenced by its own past values, whereas the overall model exhibits weak explanatory power. The impulse-response analysis shows short-term fluctuations in the effects among variables, and variance decomposition confirms that shocks in inflation and the discount rate have limited influence on money supply dynamics. The study contributes to understanding the limited effectiveness of quantitative monetary tools in achieving monetary stability in Algeria and highlights the need for policy reforms to strengthen transmission mechanisms