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Buoyant Capital Spending and Worries Over Real Appreciation: Cold Facts From Algeria

  • Oumar Diallo
  • Boileau Loko
  • Kangni Kpodar

The Government of Algeria has pursed a relatively expansionary fiscal policy in recent years, thanks to rising oil prices and revenues. The paper explores the potential effects of such a stance on real exchange rate and uncovers a relatively small appreciating effect of increased government capital expenditure. This is explained by the fact that a significant share of capital spending falls into tradable imported goods. However, the envisaged increase in capital spending, if well designed and implemented, might in the long-run translate into rising operations and maintenance expenditure-mostly nontradable goods-thereby causing a higher real appreciation. This implies that Algeria should carefully consider the implications of its public investment program on recurrent expenditure.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/286.

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Length: 21
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/286
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  1. Paul Cashin & Luis Felipe C├ęspedes & Ratna Sahay, 2003. "Commodity Currencies and the Real Exchange Rate," Working Papers Central Bank of Chile 236, Central Bank of Chile.
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 983-1004, October.
  4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  5. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
  6. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  7. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria's Experience," IMF Working Papers 05/135, International Monetary Fund.
  8. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
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