Monatery policy and financial market in Kuwait and Algeria

The exchange rate is one of the most important variables for small open economies such as in Algeria and Kuwait, where any change in the exchange rate in these countries will have a substantial effect on prices, economic growth, and the stock market. This thesis aims to set out the dynamics of monetary policy implementation in Algeria and Kuwait. This thesis will analyze the effects of monetary policy instruments on the exchange rate under distinct oil price levels in Algeria, with quarterly data spanning from 2001 and 2016 and using Towbin and Weber (2013)'s interacted vector autoregressive model. The empirical evidence suggests that the effects of monetary policy instruments on the exchange rate are not the same for the low and high level of real oil prices. The money supply has more influence on the exchange rate when the oil price level is high while the effect of money supply on the exchange rate is negative when the oil price is low. The interest rate has no impact on the exchange rate for both high and low levels of oil prices. For Kuwait, we examine whether there is a symmetric or an asymmetric relationship between the exchange rate and the stock market by using Autoregressive Distributed Lag (ARDL) model and Non-linear Autoregressive Distributed Lag (NARDL) model with monthly data spanning from June 2002 to May 2018. Based on the linear and nonlinear ARDL models, we find that there is a role of the exchange rate on the stock price for Kuwait. Both models indicate that the domestic currency appreciation has a positive effect on the stock price in a short time and then the effect becomes negative. Moreover, based on the non-linear model the depreciation in local currency has more effect on stock prices by a negative sign. Thus, the asymmetric relationship is valid for the case of Kuwait.