The Impact of Monetary Policy on Foreign Direct Investment in Algeria An Econometric Study for the Period (1980-2023)

Dr. Lahachami Abdelkamel¹, Dr. Chainoun Ramdan²

¹University of Tamenghasset (Algeria) . Email: Kamallahachami01@gmail.com¹

²University of Tamenghasset (Algeria). Email: Chainounramdan11@gmail.com²

Received: 21/01/2026 ; Accepted : 24/06/2026 ; Published : 04/07/2026

Abstract:

The study aimed to measure the impact of monetary policy on foreign direct investment in Algeria during the period (1980–2023), using the Autoregressive Distributed Lag (ARDL) model. A set of independent variables was used, represented by the logarithm of broad money supply, the logarithm of domestic credit provided to the private sector, and the logarithm of the real effective exchange rate index, while the logarithm of foreign direct investment was used as the dependent variable.

The study reached several results, including the existence of a long-term equilibrium relationship between the study variables, in addition to the existence of a significant positive relationship between the logarithm of broad money supply and the logarithm of foreign direct investment. It also found a significant negative relationship between the logarithm of domestic credit provided to the private sector and the logarithm of foreign direct investment, while there was a non-significant positive relationship between the logarithm of the real effective exchange rate index and the logarithm of foreign direct investment.

Keywords: monetary policy, foreign direct investment, Algeria.

Introduction:

Monetary policy is considered one of the fundamental factors in managing the national economy, as it plays a pivotal role in ensuring financial stability and promoting economic growth. This policy aims to regulate money supply and interest rates, which directly affects investment and financing decisions in markets. When monetary policy is effective, it contributes to creating a stable economic environment, which enhances investors’ confidence and motivates them to make bold investment decisions.

At the global level, foreign direct investment is closely linked to the monetary policies of countries, as investors seek to find safe and stable environments that allow them to achieve rewarding returns. Foreign investment decisions are affected by several factors, including interest rates, inflation, and the exchange rate, all of which are elements directly controlled by monetary policy.

In the case of Algeria, the impact of monetary policy on foreign investment is particularly evident, given the economic challenges the country is experiencing. Algeria has witnessed significant economic transformations in recent years, which highlights the need to analyze how monetary policies affect the attraction of foreign investment. Therefore, it becomes necessary to conduct a comprehensive study of the relationship between monetary policy and foreign investment in order to understand the potential effects on the national economy and provide recommendations aimed at improving the investment climate.

A- Problematic:

Based on what has been discussed previously, and considering the great importance of monetary policy and its effective role in attracting and drawing foreign direct investment to Algeria, this research paper aims to address the following main problematic:

To what extent does monetary policy affect foreign direct investment in Algeria during the period (1980–2023)?

B- Hypotheses:

Based on the main problematic, the following hypotheses can be formulated:

• There is a long-term equilibrium relationship between monetary policy and foreign direct investment in Algeria;

• There is a statistically significant inverse relationship between monetary policy and foreign direct investment in Algeria;

• The estimated model is statistically unacceptable because it contains one of the statistical problems.

C- Importance of the Study:

The study of the impact of monetary policy on foreign direct investment is of great importance in the economic context of Algeria, as it contributes to analyzing the complex relationship between monetary policy and investors’ decisions. It also helps clarify how changes in monetary policies affect the attraction of foreign investments, which enhances the understanding of economic dynamics in Algeria.

D- Objectives of the Study:

The research mainly aims to study the impact of monetary policy on foreign direct investment in Algeria during the period from 1980 to 2023. This objective contributes to achieving a deeper understanding of economic policy in Algeria and how monetary policy interacts with other economic factors, which enhances the possibility of achieving sustainable economic development.

E- Study Methodology:

This study mainly relies on the descriptive and analytical approaches, as previous studies are reviewed and the relationship between monetary policy and foreign direct investment is analyzed. The study also uses the quantitative and inductive method to measure the impact of monetary policy on foreign direct investment in Algeria, through estimating the adopted model and interpreting the results reached.

Previous Studies:

Many previous studies have dealt with the subject of monetary policy and its impact on foreign direct investment. The study of (Zoli, 2005) aimed to analyze the impact of fiscal policy on monetary policy in emerging economies, using the Vector Autoregression Model (VAR) on a sample of countries including Argentina, Colombia, Brazil, Mexico, Poland, Thailand, and Chile, during the period from 1998 to 2003. The results indicate that the behavior of monetary policy in the emerging markets studied is not directly affected by changes in real primary balances (Zoli, 2005, pp. 6–35). Researcher Angrick (2011) also attempted to analyze the constraints imposed on monetary policy in economies that depend on a fixed exchange rate system or a managed float system, by applying the Vector Error Correction Model (VECM) to five East Asian economies, namely Korea, Taiwan, Malaysia, Singapore, and Hong Kong, during the period from 2001 to 2014. The researcher concluded that there is no strong relationship between the balance of payments position in the economy and the independence of domestic monetary policy as long as the economy achieves an external surplus or faces only a temporary deficit (Angrick, 2015, pp. 11–22).

As for the study of (Mohamed, 2017), it sought to evaluate the effectiveness of monetary policy in achieving exchange rate stability in Egypt during the period from 1990 to 2017 using the Error Correction Model (ECM). The study concluded that there is a long-term equilibrium relationship between the variables, and a significant relationship between all variables except the inflation rate and foreign exchange reserves (Mohamed, 2017, pp. 485–550). The study of (Al-Talawi, 2021) also aimed to shed light on the determinants of the balance of payments in Libya and to measure the impact of these determinants on the Libyan economy during the period from 1966 to 2020, using the Johansen cointegration test and the Vector Error Correction Model (VECM). The study reached several results, including the existence of a long-term cointegration relationship between general reserves, economic growth, money supply, inflation rate, and the exchange rate of the Libyan dinar against the US dollar (Al-Talawi, 2021, pp. 1–27).

The study of (Ibrahim, 2021) also addressed the analysis of the role of monetary policy in attracting foreign investment in Sudan during the period from 1999 to 2019 using the multiple linear regression model. The study found that exchange rate policy plays an effective role in attracting foreign direct investment, which positively affects the Sudanese economy, while it showed weakness in tax policy, which negatively affects its performance (Ibrahim, 2021, pp. 388–402). On the other hand, the study of (Abu Shawish and Ward, 2021) focused on revealing the relationship between monetary policy and foreign reserves in Jordan in the long and short terms, using the Autoregressive Distributed Lag Model (ARDL) for the period from 2002 to 2019. The results showed the existence of a long-term equilibrium relationship between the study variables, in addition to a positive significant relationship between money supply and the nominal interest rate with the amount of foreign reserves, while the relationship was negative with the foreign consumer price index ratio (Abu Shawish and Ward, 2021, pp. 42–52). Finally, the study of (Nguyen, 2023) dealt with evaluating monetary policy in attracting foreign direct investment for a sample of Southeast Asian countries during the period from 1997 to 2020 using static panel models. The study found a strong positive effect of both broad money supply and human capital on foreign direct investment, while the variables of population growth and number of tourists had no noticeable effect (Nguyen, 2023, pp. 1–13).

Thus, it is clear from these previous studies presented the extent of the importance of monetary policy and its various effects on foreign direct investment and the economy in general, which requires further research to better understand these dynamics.

I. The Relationship between Monetary Policy and Foreign Direct Investment:

Monetary policy is represented by the policy used by monetary authorities in order to influence money supply through the banking system. When the central bank wishes to adopt an expansionary policy, it works to increase money supply by reducing the legal reserve, reducing the exchange rate, or by selling bonds to individuals and commercial banks through open market operations. As a result, aggregate demand increases, and then income and employment increase. The opposite occurs when a contractionary policy is adopted, where money supply is reduced in order to reduce aggregate demand (Abdjman, 1999, p. 170). In general, monetary policy refers to the procedures taken by the central bank through which money supply in the economy is monitored and managed in order to achieve predetermined objectives such as curbing inflation, achieving full employment, etc. (Warin, 2005, p. 3).

Monetary policy is considered one of the basic tools used by the state to influence macroeconomic balances and direct them toward desired goals. Among these goals, the importance of increasing foreign investment flows stands out due to the vital role it plays in achieving economic development. The more flexible, clear, efficient, and effective these policies are, and the more they adapt to economic changes and transformations at the macro level, the greater their ability to attract foreign investment, and vice versa (Allawi and Bouroucha, 2015, p. 39). Monetary policy is also considered one of the most important macroeconomic policies affecting economic activity in general, as economic theory indicates that the stability of monetary policy variables plays a vital role in attracting more international financial flows, the most important of which are foreign direct investments. The degree of stability of these variables is used as a tool to express the level of the economic environment. Monetary policy affects the management of international financial flows through several “channels” known as monetary policy transmission channels, the most prominent of which are the real interest rate, lending rate, inflation rate, and others (Al-Kharboutli, 2020, p. 115). Accordingly, the most important monetary policy channels through which the economic relationship between monetary policy and foreign direct investment becomes clear can be addressed as follows:

1. The relationship between changes in money supply and foreign direct investment: The increase in the rate of money quantity in the country attracting foreign investors contributes to enhancing the granting of loans, which facilitates foreign investors’ access to the necessary and sufficient financing to support the cycle of their economic activity, especially after the production process begins. This stimulates the attraction of foreign direct investment. A study by the Arab Monetary Fund (2017) showed that the increase in the rate of money quantity is considered one of the basic determinants of attracting foreign investment in Arab countries, as it has a positive impact on foreign direct investments (Bouguerra and Bassour, 2024, p. 162).

2. The relationship between bank loans, loans directed to the private sector, and foreign direct investment: Lending is one of the most important activities practiced by banks, as they mobilize funds from the public of depositors to reinvest them at a higher interest rate for borrowers (Mahmoud, 2008, p. 165). The importance of loans directed to the private sector expresses the importance of the private sector in the economy and the amount of available finance (Ben Achour, 2015, p. 307). The increase in credit loan rates directed to the private sector, whether as a result of credit and banking facilities or as a result of adopting an expansionary monetary policy, leads to an increase in investment levels. Through this, we find that foreign investments flow toward countries that enjoy high rates of loans directed to the private sector, as this contributes to facilitating their access to financing from local banks, especially during the production stage (Bouguerra and Bassour, 2024, pp. 162–163).

3. The relationship between changes in interest rates and foreign direct investment: The interest rate is one of the most important channels for transmitting the effects of monetary policy, and it is considered an important factor in attracting foreign capital inward (Berna and Cherbi, 2021, p. 116). The interest rate in the home country directly affects the attraction of foreign capital in the form of foreign direct investment, as well as the rise in the exchange rate. When the interest rate is high, this leads to an increase in the supply of foreign currencies. On the other hand, if interest rates are high in other countries, investments may migrate, leading to a decrease in the supply of foreign currencies. This shortage can cause a decline in exchange rates. Thus, it becomes clear that there is a close relationship between interest rates and the exchange rate and their impact on investment flows (Dikit & Shringarpure, 2013, p. 56).

4. The relationship between exchange rate changes and foreign direct investment: The exchange rate is considered one of the important determinants of foreign direct investment, as it affects the flow of foreign direct investment in two ways (Berna, 2022, p. 48):

First: A decrease in the value of the local currency of the host country leads to a decrease in the real costs of the project, and thus encourages the foreign investor to invest.

Second: Exchange rate stability in the host country leads to the stability of profit proceeds when transferred abroad, which stimulates the flow of investments. In contrast, exchange rate fluctuations lead to poor allocation of resources due to distortions that occur in local prices and their fluctuations. This results in a decrease in the efficiency of production processes. Therefore, sudden exchange rate fluctuations in host countries negatively affect the investment climate, which may lead to a decline in investors’ confidence and an increase in risks associated with investment in these markets.

5. The relationship between changes in inflation rates and foreign direct investment: Inflation rates are considered an indicator of the instability of the internal economy in the host country, which reflects the government’s inability to control macroeconomic policy. This inability contributes to the failure of the central bank to provide an appropriate monetary policy to reform the investment climate. Inflation plays an effective role in the investment decision-making process, as it negatively affects foreign direct investment. This pushes foreign investors to focus on short-term activities, leading them away from long-term investments. These transformations, in turn, affect the process of comprehensive economic development, hindering sustainable growth in the host country (Hassan, 2022, p. 33). Inflation in the host country can also have a positive impact on foreign direct investment flows, provided that it does not exceed the threshold level during a certain period (Tsurani, 2018, p. 599).

II. Measuring the Impact of Monetary Policy on Foreign Direct Investment:

In this part, we will attempt to conduct an econometric study of the impact of monetary policy on foreign direct investment in Algeria during the period (1980–2023), in order to demonstrate the extent to which monetary policy contributes to achieving foreign direct investment, using the Autoregressive Distributed Lag Model (ARDL), as follows:

1. Study Variables and Data Sources:

In order to study the impact of monetary policy on foreign direct investment in Algeria, and to answer the study problematic, data from annual time series consisting of a total of 44 observations for the period (1980–2023) were used. All data were obtained from the World Bank database for all the following variables (World Bank Database, 2024):

(LOG FDI): Logarithm of foreign direct investment, net inflows (balance of payments, current US dollars);
(LOG M2): Logarithm of broad money supply (% of GDP);
(LOG DCPS): Logarithm of domestic credit provided to the private sector (% of GDP);
(LOG REER): Logarithm of the real effective exchange rate index (2010 = 100).

2. Stationarity Test:

Table 1 shows the Augmented Dickey-Fuller (ADF) stationarity test, through which it is clear that all variables are non-stationary at level and stationary at first difference. Therefore, they are integrated of order 1 (I(1)).

Table 1: Summary of the (ADF) Test for Studying the Stationarity of Variables

Decision	At First Difference			At Level			Variable
	With Intercept and Trend	With Intercept	Without Intercept and Trend	With Intercept and Trend	With Intercept	Without Intercept and Trend
	t-statistic
	Prob
Stationary at First Difference	‎-6.9459 ‎0.0000	‎-7.0398 ‎0.0000	‎-7.1262 ‎0.0000	‎-3.5087 ‎0.0510	‎-2.5749 ‎0.1059	‎-2.1262 ‎0.0336	LOG FDI
Stationary at First Difference	‎-5.1643 ‎0.0007	‎-5.2175 ‎0.0001	‎-5.2690 ‎0.0000	‎-1.4233 ‎0.8397	‎-1.3226 ‎0.6105	‎0.2567 ‎0.7559	LOG M2
Stationary at First Difference	‎-5.4565 ‎0.0003	‎-5.4042 ‎0.0001	‎-5.4429 ‎0.0000	‎-1.1693 ‎0.9042	‎-1.4331 ‎0.5573	‎-0.8566 ‎0.3391	LOG DCPS
Stationary at First Difference	‎-8.6724 ‎0.0000	‎-8.8692 ‎0.0000	‎-8.9811 ‎0.0000	‎-4.3298 ‎0.0070	‎-1.7234 ‎0.4123	‎-0.8162 ‎0.3563	LOG REER

Lag Order:

After conducting the ADF stationarity test, which showed that all variables are stationary at the first difference, it can therefore be said that the most appropriate model for this study is the ARDL model, considering that one of the conditions for applying this model is that the study variables should be stationary at level, at first difference, or a mixture of both. Before conducting the bounds test for the ARDL model, the optimal lag period for each variable must be determined, as shown in the following figure:

Figure 01: The Optimal Lag Order for the ARDL Model

The figure above shows that the ARDL (4,4,4,1) model is the appropriate model for estimation based on determining the optimal lag order.

4. Bounds Test:

To detect the existence of a cointegration relationship between the study variables, the Bounds Test is used, the results of which are shown in the following table:

Table 2: Bounds Test

Through the table above, the calculated Fisher statistic value reached 16.98 (F-statistic = 16.98), which is greater than the upper bounds at all different levels of significance. Therefore, the alternative hypothesis, which states the existence of cointegration, is accepted. Hence, there is a long-term equilibrium relationship between the study variables.

5. Estimation of the ARDL Model:

After confirming the existence of cointegration between the study variables, the long-term equilibrium relationship must be estimated. The ARDL model is estimated in the long and short run, as shown in the following table:

Table 3: Results of Estimating the ARDL Model in the Long and Short Run

Through the long-run equation of the ARDL model, the following is evident:

• The value of the estimated parameter of the constant term indicates that when the value of the independent variables is zero, the value of the logarithm of foreign direct investment is around (-33.560), and it is significant because P<0.05. Therefore, if the value of the independent variables is zero, the value of the logarithm of foreign direct investment will decrease by 33.560 units.

• There is a significant positive relationship between the logarithm of broad money supply and the logarithm of foreign direct investment, because the sign of the coefficient of the logarithm of broad money supply is positive, in addition to the fact that P<0.05. This relationship between the logarithm of broad money supply and the logarithm of foreign direct investment in Algeria indicates that an increase in money supply enhances the attractiveness of the market for foreign investments. When money supply rises, investors have more liquidity available, which facilitates their investment decision-making. This contributes to improving the business environment and enhances confidence in the local economy, which attracts more foreign direct investments. Thus, this dynamic highlights the importance of monetary policies in supporting economic growth through attracting investments.

• There is a significant inverse relationship between the logarithm of domestic credit provided to the private sector and the logarithm of foreign direct investment, because the sign of the coefficient of the logarithm of domestic credit provided to the private sector is negative, in addition to the fact that P<0.05. This can be explained by the fact that an increase in domestic credit may lead to a decline in the attractiveness of foreign investment in Algeria. This may be due to several factors, such as foreign investors’ belief that the increase in loans reflects economic pressures or higher risks in the local market. The increase in domestic credit may also indicate greater reliance on local financing, which reduces the need for foreign investment. This dynamic reflects the importance of improving the local business environment to attract foreign investments, which requires economic policies to achieve a balance between supporting the private sector and attracting external investments.

• There is a non-significant positive relationship between the logarithm of the real effective exchange rate and the logarithm of foreign direct investment, because the sign of the coefficient of the logarithm of the real effective exchange rate is positive, in addition to the fact that P>0.05. This can be explained by the fact that an increase in the logarithm of the exchange rate may be associated with an increase in the logarithm of foreign direct investment in Algeria; however, this relationship does not have sufficient strength to be statistically significant. This means that the effect of the exchange rate on foreign investors’ decisions is not sufficient to be a main attracting factor. Instead, investors’ decisions are affected by other factors such as economic stability, government policies, the general investment environment, etc. Therefore, decision-makers should focus on improving these factors to enhance the attractiveness of foreign direct investment in Algeria.

1. Diagnostic Tests:

• Appendix No. 2 refers to the normality test of residuals, where it is clear that the value of the normality test of residuals (J-B = 0.354) is greater than 0.05. Therefore, the alternative hypothesis, which states that the residuals of the estimated model follow a normal distribution, is accepted.

• Appendix No. 3 refers to the autocorrelation test of residuals using the Breusch-Godfrey Serial Correlation LM Test, where it is clear that the statistical value (F = 2.21) and its corresponding probability are greater than 0.05, which indicates the absence of autocorrelation among the residuals.

• Appendix No. 4 refers to the heteroskedasticity test of the error term using the ARCH Test, where it is clear that the statistical value (F = 1.37) and its corresponding probability are greater than 0.05, which indicates that there is homogeneity in the random error term.

• Appendix No. 5 refers to the structural stability test of the model, through which it is clear that the model is characterized by stability and consistency.

Conclusion:

Through this study, we attempted to measure the impact of monetary policy on foreign direct investment in Algeria during the period extending from 1980 to 2023, in order to answer the main problematic represented in: “To what extent does monetary policy affect foreign direct investment in Algeria during the period (1980–2023)?” This was done by addressing a number of previous studies, in addition to the relationship between monetary policy and foreign direct investment. The Autoregressive Distributed Lag (ARDL) model was also used, as it is considered the appropriate model for this study. The study reached several results, the most important of which are as follows:

• There is a long-term equilibrium relationship between the study variables.

• There is a significant positive relationship between the logarithm of broad money supply and the logarithm of foreign direct investment.

• There is a significant inverse relationship between the logarithm of domestic credit provided to the private sector and the logarithm of foreign direct investment.

• There is a non-significant positive relationship between the logarithm of the real effective exchange rate and the logarithm of foreign direct investment.

The estimated model is considered statistically acceptable because it is free from all statistical problems.

Proposed Recommendations:

In order to develop the investment climate in general and increase Algeria’s ability to attract foreign investors in particular, the following recommendations can be presented:

• Reassessing interest rates to make them more competitive, which contributes to attracting investments.

• Working to stabilize the exchange rate and enhance transparency in monetary policies in order to build investor confidence.

• Stimulating innovation by supporting start-ups and modern technology to attract investments in new sectors.

• Implementing training programs to raise the efficiency of local labor and meet investors’ skill needs.

• Providing tax incentives to foreign investors in strategic sectors to enhance investments.

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