Fiscal Reaction Function in Algeria: Nonlinear ARDL Approach

This study estimated the fiscal reaction function to evaluate the sustainability of fiscal policy in Algeria from 1990 Q1 to 2022 using a nonlinear ARDL model. The results indicate that high debt levels adversely affect the budget balance during positive shocks, highlighting the need for effective debt management. The negative impact of the spending gap during downturns reflects Algeria’s reliance on government spending and the drawbacks of pro-cyclical fiscal policies. The output gap’s consistent positive effect on the budget balance suggests effective fiscal management. Additionally, oil price shocks, trade openness, and demographic changes all play significant roles in influencing the budget balance. Overall, the study reveals that insufficient responses to primary budget balance shocks weaken fiscal sustainability, emphasizing the need for improved debt management, counter-cyclical policies, economic diversification, and strategic fiscal adjustments to enhance financial stability in Algeria.