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Exchange Rate And Inflation Targeting In Morocco And Tunisia

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Author Info
Grand Nathalie (Institut de la Méditerranée, Marseille, FRANCE)
Dropsy Vincent (California State University, Fullerton, USA)
Abstract

Morocco and Tunisia have started to open their markets to international trade and capital flows in order to bolster investment and growth. These liberalization programs require important adjustments in their economic policies, in particular their exchange rate regimes and monetary policies. This objective of this paper is to examine why Morocco and Tunisia should progressively opt for greater exchange rate flexibility as well as a monetary policy based on inflation targeting rather than exchange rate targeting and money-growth rules, as their markets are increasingly liberalized. First, their past economic policies are reviewed and analyzed. Second, the theoretical sources of inflation (cost push and demand pull factors as well as factors due to financial liberalization) are identified. Third, a Markov switching model with time-varying transition probabilities is estimated for Morocco and Tunisia to provide important information concerning the mechanisms underlying inflation regime changes. The empirical results provide evidence that high inflation regimes are more persistent in Morocco than in Tunisia, and that inflation regime switches can be explained by external shocks in the 1970s, and by the sound fiscal and monetary policies in the mid-1980s. Finally the institutional and operational conditions for the success of an inflation-targeting framework are outlined.

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Paper provided by EconWPA in its series Macroeconomics with number 0507018.

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Length: 24 pages
Date of creation: 18 Jul 2005
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Handle: RePEc:wpa:wuwpma:0507018

Note: Type of Document - pdf; pages: 24. Markov switching
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Keywords: Markov switching Inflation Inflation targeting Monetary policy Central Banks Policy Designs and Consistency Policy Coordination Morocco Tunisia

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E - Macroeconomics and Monetary Economics

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