Simulating Banking Sector Dynamics in North Africa: Methodological Insights from DSGE Models

Kacem Sara and Abdoulaye Aboubacari Mohamed
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Kacem Sara: University Science Islam (Malaysia)
Abdoulaye Aboubacari Mohamed: Laval University (Canada)

IJEP, 2026, vol. 9, issue 01, Pages : 179-209

Abstract: North African economies face a structural policy paradox, in which bank-centric financial systems and persistent public-sector dominance complicate coordinating the monetary and fiscal instruments needed for price and debt stability. This study examines how fiscal-monetary interactions shape inflation, output, and debt dynamics in the region, and evaluates which Taylor rule specification best supports stability.We develop a small-scale open-economy DSGE model, extending the Galí and Monacelli (2008) framework with Calvo price rigidities, household heterogeneity, and a monopolistically competitive banking sector subject to capital and liquidity constraints, estimated using Bayesian methods on five macroeconomic observables for North Africa spanning 2000–2022, and compare a standard output-gap Taylor rule (Model 1) with a growth-augmented rule (Model 2).Posterior estimates indicate moderate price rigidity, averaging four quarters, and confirm a monetary dominance regime with active, inflation-responsive rates and substantial interest rate smoothing, while fiscal authorities remain passive and debt-focused. Contractionary monetary shocks generate persistent negative output gaps and crowd out government spending, whereas fiscal shocks produce procyclical, debt-sensitive responses depending on the prevailing monetary rule.The growth-augmented Taylor rule delivers stronger debt stabilization and smoother adjustment, indicating that anchoring policy to output growth improves fiscal-monetary coordination in North Africa.

Keywords: Monetary-Fiscal Coordination; Economic Stability; Inflation; DSGE; North African Economies (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:bjm:ijep00:v:9:y:2026:i:01:id:411

DOI: 10.54241/2065-009-001-010

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