Asymmetric effects of oil price shocks on the demand for money in Algeria

Abstract

This paper investigates the symmetric and asymmetric effects of real oil prices on real money demand in Algeria over the period 1999:Q1–2020:Q1. Using a linear autoregressive distributed lag model (ARDL), and a nonlinear autoregressive distributed lag model (NARDL), we find no evidence of a long-term relationship among the variables. Interestingly, we reveal that the NARDL model provides strong evidence of a stable money demand. Moreover, the evidence shows that, in the short-term, only real oil price reductions will result in a decrease in real money demand. In the long-term, our findings suggest that oil price increases (decreases) will lead to higher (lower) money demand. Additionally, we find that negative oil price shocks will yield a stronger effect on money demand compared to positive shocks. These results indicate that money demand is a channel through which oil price shocks may affect the macroeconomic activity in Algeria. Therefore, Algerian policymakers should incorporate this asymmetric relationship between oil prices and money demand in designing their monetary policies.