Fear of floating and exchange rate pass through to inflation in Algeria

Abstract

The purpose of this paper is twofold: (i) identify a "fear of floating" theory in Algeria using indicators defined in empirical studies of Calvo and Reinhart (2002) and Hausmann et al (2000) and (ii) examine empirically one of its explanations; a strength pass-through of devaluation on domestic prices. For results, US/DZ exchange rates and foreign reserves variability probabilities, on monthly data over 1990-2015 period, classify Algeria among fear of floating countries. The VAR model based on Mc Carty (2007), over quarterly data of 2000-2016 period, shows that a three stage of inflation; import, producer and consumer prices react at US/DZ and do not at EU/DZ exchange rate.

Keywords: Exchange rate regime, inflation, pass-through, monetary policy, VAR model