Monetary sterilization to net capital inflow  «  evidence from Algeria»

Houssam Eddine, Aboura; Benali, Belazouz

الريادة لاقتصاديات الأعمال
Volume 4, Numéro 2, Pages 329-336
2018-06-24

Monetary Sterilization To Net Capital Inflow « Evidence From Algeria»

Authors : Houssam Eddine Aboura . Benali Belazouz .

Abstract

Algeria is a net oil exporter that gains from the balance of payment surplus from decades except period of slow down in oil prices; the domestic economy is strongly related to oil revenues, which represent the most important source of revenues to the government over time (41٪ in 2018 ). As a result, government expenditure and economic growth are highly related to the oil revenue inflows. International capital inflow is a key element for economic development especially the case of Algeria with an important degree of economic openness 59٪ in 2016. The increase in international capital inflows despite the temporary contraction during the global crisis of oil price decline for oil exporter countries, or countries with strong financial openness has motivated policy discussions on the associated benefits and costs of capital mobility across countries. The most common benefits of inflows is that outside revenues boost domestic demand ( either for consumption or investment )than consequently stimulate economic growth , this should lead to lower rate of unemployment ( non full capacity of production ), finance public sector debt. The surge of inflows can be costly to the economy, through the concentration of capital flows and lack of access (for small countries), domestic misallocation of capital flows, herding contagion and volatility of capital flows.The large capital inflows induced by financial openness can have undesirable macroeconomic effects including rapid monetary expansion (due to the difficulty and cost of pursuing sterilizationpolicies); inflation pressures (resulting from the effect of capital inflows on domestic spending). Policy makers are facing a big challenge to benefit from net capital inflows and keep low inflation rates, as the surge of inflows and central bank intervention at foreign exchange market lead to an important increase to money supply, monetary authorities may sterilize the accumulation of foreign exchange reserve to maintain low inflation rates. This paper aims to analyze central bank response to capital inflow surges, considering that money supply is strongly related to general price level(quantitative theory of money), through the indirect channel of money and income as a channel by which imported inflation is transmitted to the domestic one, central bank attempts to limit this channel by their instruments. This paper discuss; how bank of Algeria sterilize the net capital inflows? To answer this question we suggest the following hypothesis: Hypothesis 01: Algerian financial system is not opened on the world financial system (capital mobility), as a result domestic financial assets and foreign assets are not perfect substitute. Hypothesis 02:international capital flows in Algeria depend on current account surplus or deficits. So the paper is presented as follows: section one presents a brief literature on sterilization policy and their instruments. Section tow presents bank of Algeria actions in the light of massive inflows due to current account surplus.