Balance of Payments as a Monetary Phenomenon: An ARDL Bounds Test Method for Algeria

Abstract Research background Every country attempts to improve its balance of payments (BOP) position to enhance macroeconomic policy. Algeria, like many developing countries, is experiencing a BOP deficit. This raises concerns about the reasons for this deficit and prioritizes the quest for potential answers. Purpose In the context of the Monetary Approach to the balance of payments (MABP), this paper investigates the long-run relationship between domestic credit, inflation, interest rate, GDP, and net foreign assets to find whether BOP is a monetary phenomenon in Algeria from 1980 to 2019. Research methodology: The Autoregressive Distributed Lag (ARDL) bounds test, combined with the critical approximation p-values of Kripfganz and Schneider (2020), has been applied. Results The findings clearly showed a long-run relationship among the variables. The long-run estimates strongly supported MABP propositions, and domestic credit had a negative and statistically significant influence on net foreign assets. This suggests that Algeria’s BOP is a monetary phenomenon, and excess money supply played a crucial role in Algeria’s balance of payments disequilibrium. Novelty The contribution of this paper is the use of the ARDL bounds test in combination with the novel critical approximation p-values of Kripfganz and Schneider (2020), which provided more robust results. This study could help monetary authorities to elaborate the suitable policies in dealing with BOP problems in Algeria.