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Non-linear causality between exchange rates, inflation, interest rate differential and terms of trade in Tunisia

Author

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  • Fahima Charef
  • Fethi Ayachi

Abstract

Purpose - The purpose of this paper is to investigate the dynamic relationship between inflation, interest rate differential, the exchange trade and exchange rate parities, i.e. (USD/TND, EUR/TND and JPY/TND). Design/methodology/approach - Given the existing non-linear form between the different time series in this study, the empirical analysis is based on the using of non-parametric method such as the artificial neural networks. In order to detect the causality relationship between the variables, the authors use an NARX model. Findings - Mixed results were found; there is a bidirectional relationship between inflation and exchange rate among others. Results also show that there is a strong correlation between the terms of trade and inflation, which says that trade openness increases the demand for imported goods and, therefore, causes more inflation for Tunisia. Originality/value - After these results, it is important for policymakers to know which factors influence exchange rate stability, especially in developing countries like Tunisia.

Suggested Citation

  • Fahima Charef & Fethi Ayachi, 2018. "Non-linear causality between exchange rates, inflation, interest rate differential and terms of trade in Tunisia," African Journal of Economic and Management Studies, Emerald Group Publishing Limited, vol. 9(3), pages 274-289, August.
    • Handle: RePEc:eme:ajemsp:ajems-02-2017-0034
    DOI: 10.1108/AJEMS-02-2017-0034
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    Cited by:

    1. Mohamed Ali Chroufa & Nouri Chtourou, 2023. "Asymmetric relationship between exchange rate and inflation in Tunisia: fresh evidence from multiple-threshold NARDL model and Granger quantile causality," SN Business & Economics, Springer, vol. 3(7), pages 1-21, July.

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