Oil windfalls in a controlled economy: A ‘fix-price’ equilibrium analysis of Algeria

• Published in: Journal of development economics Vol. 28; no. 1; pp. 63 - 81
• Main Authors: Conway, Patrick, Gelb, Alan
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.02.1988; Elsevier; North-Holland Pub. Co; Elsevier Sequoia S.A
• Series: Journal of Development Economics
• Subjects: Algeria; Demand; Econometrics; Economic models; Fixed prices; Macroeconomics; Oil; Prices; Studies; Unemployment; Algeria
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/0304-3878(88)90014-4

The Algerian macroeconomic response to oil windfalls, which differs from that expected of a neoclassical economy, is examined through application of ‘fix-price’ equilibrium analysis. A model of the aggregate macroeconomy is specified and its response decomposed into behavioral and involuntary spillover elements. The implications of Classical unemployment are derived. Econometric estimation of the model for the period 1966–1984 supports the importance of involuntary spillovers as an explanation of Algeria's unusual pattern of demand and money balance accumulation; rationing is shown to have been considerable relative to observed consumption in recent years. Two major conclusions are drawn. (1) Fix-price modeling captures an important feature of the Algerian economy during this period; analyses ignoring spillovers will provide biased results. (2) Conventional neoclassical estimation will in general confound behavioral parameters and spillover effects for countries where the price mechanism is not permitted to operate freely. This will lead to biased behavioral estimates and inaccurate policy advice.