Business Cycles in Developing Economies: The Case of Tunisia

The aim of this paper is to establish stylized facts for the small developing economy of Tunisia using time series techniques over the period 1963-93. This is achieved by testing for the macroeconomic variables driving the business cycle. The paper extends the vector-autoregression (VAR) approach adopted by Blanchard and Quah (1989) and by Gali (1992), which aliows only for short-term analysis, into a vector error-correction approach (VEC) that allows for both the short-term and the long-term analysis of the business cycle. Using multivariate cointegration techniques, the analysis shows that: (i) in the short-run real GDP. has little persistence, so that an innovation at its level generates only transitory effects, with inflation being the only variable that Granger-causes the business cycle; (ii) in the long-run GDP cointegrates with money supply, the exchange rate and inflation rate with three common stochastic trends driving the system towards a stationary, long-run equilibrium state; and (iii) money supply and the exchange rate are neutral in the short-run but have a significant effect on the business cycle in the long-run. JEL Classification: E32, F41