The study of relationship between the financial stability and economic growth in Algeria using the ECM model for the period (2000-2018)

Abstract

This paper aimed to study the relationship between financial stability and economic growth in Algeria during the period 2000–2018 using the error correction model (ECM). After examining the stability, it was found that the series were unstable in the level. But it stabilized at the first difference and become integrated in the first degree. The Johansen test showed one vector of the common integral, which indicates the existence of a long-term complementarity relationship between the variables. This allows the application of the ECM model. The study proves the existence of a causal relationship between financial stability as an explecatory variable and economic growth as a dependent variable. The results of the study also showed the existence of a long- and short-term relationship between financial stability and economic growth. It also proved that the existence of a stable financial sector is necessary for economic growth as financial stability contributes within the ratio of 62.5% while contributing other factors by 37.5% in the economic growth rate.