Does Financial Development Affect Economic Growth Asymmetrically in Algeria? Evidence from a PCA-Based NARDL Model

This study examines whether financial development affects economic growth asymmetrically in Algeria using annual data for 1980–2020. Algeria represents a particularly relevant case because its hydrocarbon dependence, bank-based financial system, strong state involvement in banking, and exposure to oil-price and macroeconomic shocks may shape the finance–growth relationship differently from more diversified economies. The study constructs a composite financial development index using principal component analysis of liquid liabilities, private-sector credit, and bank deposits to GDP (%); the first component explains 81.25% of total variance. A nonlinear autoregressive distributed lag (NARDL) model is estimated with trade openness and government expenditure as controls. Unit-root tests confirm that the variables are I(0) or I(1), and the bounds test supports cointegration (F = 7.455). In the long run, trade openness positively affects growth, whereas government expenditure is statistically insignificant. Positive financial-development shocks are associated with lower long-run growth, although the coefficient is significant only at the 10% level, while negative shocks are insignificant. In the short run, positive shocks generate delayed growth benefits after one and two years. Although the Wald test rejects long-run symmetry within the estimated specification, uncertainty around the individual long-run coefficients warrants interpreting the findings as suggestive evidence of asymmetry that requires further confirmation. Short-run symmetry is not rejected. The error-correction coefficient (−0.674) implies rapid adjustment toward equilibrium. The findings suggest that the quality and productive allocation of financial resources may matter more for growth than financial deepening alone.