The International Journal in Economics and Business Strategies
Volume 5, Numéro 2, Pages 39-59
2025-12-31
Shocks, Frictions, Informality, And The Algerian Business Cycle: A Heterogeneous Agent New Keynesian Approach
Authors : Abderrahmane Kaci .
Abstract
Abstract: This paper develops and estimates the first Heterogeneous Agent New Keynesian (HANK) model for Algeria, a commodity-exporting economy characterized by deep financial exclusion, a large informal sector, and fiscal dominance. The model incorporates an incomplete-markets household block generating a realistic distribution of marginal propensities to consume (MPCs), a three-state endogenous labor market — formal employment, informal employment, and unemployment — calibrated to reproduce the dual structure of Algerian employment (Formal 38.8%, Informal 51.1%, Unemployed 10.1%), and a small open economy block capturing oil export dynamics, a managed exchange rate, and the sovereign wealth fund mechanism. The model is estimated by Simulated Method of Moments using 96 quarters of Algerian macroeconomic data, matching eleven second-order moments, and converges with an overall criterion Q = 7.63. The indirect earnings channel — through which monetary policy affects aggregate demand via employment and labor income rather than intertemporal substitution — quantitatively dominates monetary transmission, consistent with the near-absence of formal financial intermediation documented by the World Bank Findex (2024): only 35.3% of adults hold formal accounts and 3.7% borrow formally. A policy counterfactual demonstrates that replacing Algeria's universal subsidy regime (657 billion DA annually) with a targeted cash transfer of equal fiscal cost raises the aggregate consumption multiplier by 18.6%, because the targeted scheme concentrates resources on high-MPC informal and unemployed households (average MPC 0.45 vs 0.38 universal). The model supports a rules-based fiscal stabilization strategy — counter-cyclically managing oil windfall transfers through the sovereign wealth fund — as the primary instrument for macroeconomic stabilization in an economy where the interest rate instrument reaches only a small fraction of aggregate demand.
Keywords
Keywords: HANK, heterogeneous agents, informality, Algeria, oil shocks, monetary transmission, subsidy reform
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