Estimating the Clarida-Galí-Gertler (1999) DSGE Model for the Algerian Economy: A Structural Analysis of Monetary Policy Efficiency

Abstract

This study investigates estimates a structural New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for Algeria, grounded in the canonical framework of (Clarida et al., 1999). By utilizing the Unobserved Components-Dynamic Conditional Score (UC-DCS) framework in R, we successfully disentangle the permanent trend from the transitory output gap, explicitly accounting for the heavy-tailed shocks and outliers inherent in a rentier, oil-dependent state. Our Bayesian structural estimation in Stata reveals a high degree of intertemporal optimization within the Algeria economy, evidenced by a discount factor (β = 0.953) that aligns with the upper bounds of international benchmarks. This elevated value indicates that current inflation dynamics are predominantly driven by forward-looking expectations rather than purely historical inertia. Consequently, the effectiveness of the Bank of Algeria's monetary anchor is amplified by the expectational channel, with a posterior response coefficient (1/ψ) of 1.44, the authority successfully leverages the Taylor Principle to coordinate these anticipations. However, the interplay between high discount rates and structural rigidities (κ = 0.309) suggests that while the expectations-heavy nature of the aids stabilization, the underlying transmission remains sensitive to the persistent memory of exogenous shocks and hydrocarbon-driven fluctuations in the natural rate of interest.