OIL PRICES SHOCKS AND INFLATION RATEERSISTENCE FOR ALGERIA: A FRACTIONAL COINTEGRATION RELATIONSHIP

Abstract

This study aims to analyse the relationship between oil prices and inflation rates in Algeria to determine the extent of inflation persistence in face to oil price shocks from January1998 to March 2023 using the recently developed Fractional Cointegration Model, which allows residuals to be fractionally integrated rather than stationary, with the classical cointegration approach based on I(0) stationarity or I(1) cointegrating relationships. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in Algeria and studying the impact of some price shocks on it, such as oil price shocks. Our results also showed that Algeria has a co-integration relationship between oil prices and the inflation rate, with an estimated persistence of 0.883, which is greater than 0.5 and less than 1. This indicates that the impact of oil price shocks is still present for a long time on the inflation rate persistence in Algeria, in other words the inflation rate in Algeria will persistence for a longer period due to the shock of oil prices before eventually fading away, and with the adoption of a monetary policy targeting inflation in Algeria, it will contribute to reducing the inflation rates persistence.