Unraveling the Impact of Oil Price Fluctuations on Economic Growth: VAR Analysis and Causality Testing

This study investigates the complex relationship between oil price fluctuations and economic growth in Algeria, using time series data from 1973 to 2023. Advanced econometric techniques, including Vector Autoregression (VAR), Impulse Response Functions (IRFs), Variance Decomposition (VD), and the Toda-Yamamoto causality test, were employed to examine both the direct and indirect effects of oil price changes on the country’s growth. The results of the VAR model indicate a strong positive relationship between oil prices and economic growth, emphasizing the critical role of hydrocarbon exports in driving Algeria’s economy. However, this connection is influenced by other macroeconomic factors, such as inflation, exchange rates, and money supply. IRF analysis shows that while oil price increases initially stimulate growth, long-term impacts are moderated by adjustments in monetary policy and exchange rates. The variance decomposition analysis further highlights that oil price volatility significantly influences short-term economic performance, but its effect diminishes over time, suggesting progress in economic diversification, policy adaptation, and the effectiveness of managing oil-related volatility. The Toda-Yamamoto causality test provides additional insights, confirming unidirectional causality from oil prices to growth and highlighting indirect effects through exchange rates and money supply. These findings underscore the importance of continued diversification efforts in oil-dependent economies like Algeria, as well as the need for adaptive monetary and exchange rate policies to ensure both short-term stability and long-term growth. This study contributes to the broader literature on oil price-growth dynamics and offers valuable guidance for policymakers in resource-rich countries.