Estimating central bank behavior in adjusting interest rates : evidence from Algerian economy

Abstract EN

We develop in this paper an empirical framework to estimate the reaction function of Algeria's Central Bank using an augmented Taylor rule.

Our purpose is to test the relationship between interest rates and the stated monetary policy goals of controlling inflation and stimulating output growth.

We propose the use of Kalman filter technique to estimate both the unobserved variables and the parameters of the model.

Our empirical findings based on quarterly data covering the period Q1: 2000 to Q1: 2019 on Algerian economy, which is considered as oil dependent and a fairly dollarized small open economy, show that the Central Bank instrument doesn't have an effect on inflation and output gap.