Assessing the role of the credit channel in transmitting monetary policy impacts to the real sector in Algeria

Samiha   LAKAHEL; Youssef   RAKHROUR

Samiha LAKAHEL Higher School of Commerce (Kolea), Laboratory of Practical studies in business sciences and management sciences
Youssef RAKHROUR University of Laghouat, Laboratory of Practical studies in business sciences and management sciences

Keywords: monetary policy, credit channel, transmission mechanism, financial intermediation, real economy

Abstract

This study examines the role of monetary policy instruments in Algeria, with a focus on the credit channel as a transmission mechanism to the real economy. The primary objective is to examine how monetary policy shocks impact key macroeconomic variables, namely industrial production, inflation, and short-term credit, within a developing financial environment. The research hypothesizes that the credit channel constitutes the dominant pathway through which monetary impulses affect real activity. Using a Vector Autoregressive (VAR) model, the study analyses dynamic interactions among the money market rate (MMR), real exchange rate (RER), short-term credit (LSTC), consumer prices (LPCI), and industrial production (LIPI). The findings reveal that monetary policy shocks have a significant impact on real activity through the credit channel. At the same time, the exchange rate plays a secondary role, and consumer prices respond weakly due to structural rigidities. The results highlight the importance of strengthening financial intermediation to enhance the transmission efficiency of monetary policy. Policy recommendations include improving credit allocation toward productive sectors and reinforcing institutional frameworks to foster sustainable economic growth.

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