Nonlinear ARDL Analysis of Real Effective Exchange Rate’s Asymmetric Impact on FDI Inflows in Tunisia

Research findings regarding the influence of the real effective exchange rate on foreign direct investment inflows usually suggest that the real effective exchange rate has a symmetric impact on a country’s inflows of foreign direct investment. In this vein, the purpose of this chapter is to investigate whether a real effective exchange rate is asymmetrically passed on to foreign direct investment inflows in Tunisia using the Nonlinear Autoregressive Distributed Lag (NARDL) approach. We found that real effective exchange rate asymmetrically impacts foreign direct investment inflows in both the short- and long run, using annual data from 1980 to 2019, that is, the movement in foreign direct investment inflows in Tunisia tends to be more prone to appreciating the real effective exchange rate than to depreciating the real effective exchange rate. This leads to the conclusion that real effective exchange rate management is essential for FDI inflows attraction in Tunisia. Therefore, Tunisia’s monetary authorities should develop and apply efficient exchange rate control strategies. In order to prevent fiscal policy from undermining monetary authorities’ efforts to properly manage the exchange rate, there is also a requirement for policy coordination between the monetary and fiscal authorities. So, if monetary authorities wish to come to sound findings and make the right policy decisions, it is critical to precisely explain the nature of the link between the exchange rate and foreign direct investment inflows in the context of the NARDL model.