Implications of the global financial crisis on the algerian economy

Abstract EN

The global financial crisis may affect the Algerian economy through the following channels : (1) increase of costs of firms’ borrowing to finance their investment, (2) decline in oil prices, and (3) the lower world interest rates.

This paper uses a small-open economy model with financial frictions (the financial accelerator) to examine the implications of the global financial crisis on the Algerian economy and evaluates the importance of the main transmission channels.

Firms operating in Algeria borrow from domestic and foreign banks. The financing costs depend on firms’ balance sheet positions and on external finance premiums charged by banks for higher risks they are facing.

Main findings are that the global financial crisis has substantially and negatively affected the Algerian economy and all channels are important in the transmission of the financial shocks.

Nevertheless, the implementation of expansionary monetary and government spending policies can successfully help the economy avoid recession and thus offset the negative implications of the global financial crisis.