ANALYZING THE RELATIONSHIP BETWEEN MONEY SUPPLY AND EXCHANGE RATE IN ALGERIA USING THE VAR MODEL: AN ECONOMETRIC STUDY FOR THE PERIOD 1990-2023

Objective: This study aims to analyze the relationship between money supply and the exchange rate of the Algerian dinar over the period 1990-2023. It seeks to provide insights into the short- and long-term dynamics between these variables and their implications for monetary policy in Algeria. Theoretical Framework: The research builds on monetary theory and exchange rate economics, exploring how money supply influences exchange rate movements. Concepts such as the Quantity Theory of Money and exchange rate regimes form the foundation of the analysis. Method: The study employs a Structural Vector Autoregressive (VAR) model, utilizing time series data on money supply and exchange rates. Stationarity of the data was tested using the Augmented Dickey-Fuller test, and the existence of a long-term relationship was examined through Johansen's cointegration test. Impulse Response Functions (IRFs) and Variance Decomposition (VD) analyses were conducted to capture dynamic interactions. Results and Discussion: The findings reveal a significant but limited interaction between money supply and exchange rates. Money supply impacts exchange rates primarily in the short term, with inflationary effects causing initial depreciation of the dinar. The results also highlight the self-driven nature of each variable, with limited cross-variable influence. The implications of these findings are discussed in the context of Algeria’s oil-dependent economy and fluctuating exchange rate regimes. Research Implications: The study underscores the need for coordinated monetary policies aimed at stabilizing exchange rates and mitigating volatility. Policymakers should consider both short- and long-term dynamics when adjusting monetary tools, particularly in resource-dependent economies. Originality/Value: This research contributes to the understanding of monetary-exchange rate dynamics in Algeria, offering practical recommendations for enhancing economic stability. It provides a novel perspective on the interplay between internal monetary factors and external economic pressures.