The nexus between monetary base and government debt - empirical evidence from Algeria

The complex interplay between monetary and fiscal policies is crucial for macroeconomic stability, especially in emerging economies like Algeria. Algeria's heavy reliance on oil revenue adds a unique layer of complexity, as global oil price fluctuations significantly impact government finances. This study investigates the relationship between the monetary base and government debt, a crucial aspect of understanding how fiscal and monetary policies interact in this context. Problem statement. This study aims to analyze the relationship between the monetary base (M1) and government debt in Algeria, examining how this nexus influences the effectiveness of both fiscal and monetary policies. Unresolved aspects of the problem. The unresolved issues in our work is the real dynamics between fiscal and monetary policies in the side of government debt management. Purpose of the article. By understanding this relationship, the study aims to provide valuable insights for policymakers regarding potential consequences of their decisions and the importance of coordination for achieving long-term macroeconomic stability. Presentation of the main material. The study employs a time-series econometric approach using the Autoregressive Distributed Lag (ARDL) model. This approach allows for the analysis of the long-term cointegration between the monetary base and government debt, using data from 1990 to 2024. The analysis also incorporates a simulation using MATLAB to visualize the relationship between the two variables over a 20-year horizon. Conclusions. The results of the ARDL analysis indicate a statistically significant negative relationship between lagged government debt and M1, suggesting that higher government debt levels in the previous period lead to a decrease in the monetary base in the current period. This finding suggests that Algeria's non-Ricardian fiscal policy, which relies on increasing public debt ratios to satisfy budgetary constraints, has a notable impact on the monetary base. The simulation results further illustrate the short-term effects of government debt on Algeria's monetary base, emphasizing the need for careful coordination between fiscal and monetary policies to ensure long-term macroeconomic stability.