Can oil prices predict the direction of exchange rate movements in Algeria? A TAR and MTAR models approach

Attouchi Manel , Abdelkrim Messaoudi , Dahmani Mohamed Driouche

Abstract

This study investigates the relationship between oil price and exchange rate in a small oil-exporting economy. We estimate a TAR and MTAR model by using annual data from 1970 to 2018 in Algeria, as well as the linear Granger causality tests and nonlinear Kyrtsou-Labys causality tests. The results indicate that the asymmetric error correction limit of the MTAR_c model is not significant. The results of the linear and non-linear causality tests supported the absence of a causal relationship between oil prices and real exchange rates in both directions. Based on the results of this study, fluctuations in oil prices do not lead to an appreciation of the exchange rate, which eliminates the mechanism of the Dutch disease in Algeria.