The Monetary Approch to Balance of Payments and Exchange Rate Equilibrium Determination with an Empirical Application to the Case of Algeria

Lakhdar Adouka, Yahia Boucheta, Abderahmmane Chenini, Abdennour Belmimoune, Mohamed Kerbouche

Abstract


The aim of this paper is to explain the exchange rate by using the fundamental determinants of cointegration techniques to search if there is a long-term relationship between exchange rate and fundamentals of the Algerian economy. For this purpose we applied the model of the monetary approach of the balance of payments to the Algerian economy. We based in this study in Edward model That’s takes into account all external factors (terms of trade, external debt ...) and internal factors (government expenditure, budget deficit, money supply ...) for the determination of real exchange rate equilibrium, and we takes in consideration two variables, domestic credit, and international reserve, as they are the most important in monetary approach to balance of payments. The results of our study are summarized in the following point: The variable international reserve has a positive sign (the expected sign is positive) that allowed us to conclude that an increase in international reserve unit will result in an appreciation of the exchange rate of 9.60*10-12 %. The domestic credit has a positive influence on real exchange rate (the expected sign is negative), that allowed us to conclude that an increase in domestic credit unit will result in an appreciation of the exchange rate of 9.41*10-10 %. This result contradicts in the economy theory.

Full Text: PDF DOI: 10.5539/ibr.v6n4p114

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International Business Research  ISSN 1913-9004 (Print), ISSN 1913-9012 (Online)

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