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Exchange rate Pass-Through to domestic prices in Tunisia: a short and long run analysis

Author

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  • Helali, Kamel
  • Kalai, Maha
  • Boujelben, Thouraya

Abstract

This study analyzes the impact of the exchange rate fluctuations in the short and long-runs in Tunisia under a pure commitment policy through two channels. The first is the Structural Vector Autoregression used to analyze the short run effects of the exchange rate on the industrial production index and on the consumer and import price indexes. The second is the Vector Error Correction Model used to examine the long run dynamic effects of the exchange rate upon the same variables relying on Tunisian monthly data during the period January 1993 to June 2011. Unlike several empirical studies, which show that the impact of the exchange rate movements on prices has been reduced over the past few years in the industrialized countries, the exchange rate is found to be a potential source not only of production but also of inflation reduction in Tunisia. Indeed, the direct channel of the exchange rate seems to have a significant impact on production and inflation in the long-run, whereas the indirect one has no effect on the money supply. These results strongly support the monetary policy of the central bank targeting the exchange rate because there is a strong correlation between this rate and prices.

Suggested Citation

  • Helali, Kamel & Kalai, Maha & Boujelben, Thouraya, 2014. "Exchange rate Pass-Through to domestic prices in Tunisia: a short and long run analysis," MPRA Paper 62204, University Library of Munich, Germany, revised 10 Dec 2014.
  • Handle: RePEc:pra:mprapa:62204
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    File URL: https://mpra.ub.uni-muenchen.de/62204/1/MPRA_paper_62204.pdf
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    References listed on IDEAS

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    1. Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 961-1013.
    2. Auer, Raphael A. & Schoenle, Raphael S., 2016. "Market structure and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 98(C), pages 60-77.
    3. Devereux, Michael B & Yetman, James, 2003. " Predetermined Prices and the Persistent Effects of Money on Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 729-741, October.
    4. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    5. M. Abimbola Oyinlola & M. Adetunji Babatunde, 2009. "A Bound Testing Analysis Of Exchange Rate Pass- Through To Aggregate Import Prices In Nigeria: 1980-2006," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 97-109, December.
    6. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
    7. Adel BOUGHRARA, 2007. "Can Tunisia Move To Inflation Targeting?," The Developing Economies, Institute of Developing Economies, vol. 45(1), pages 27-62, March.
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    Cited by:

    1. Dahem, Ahlem & Siala Guermazi, Fatma, 2016. "Exchange rate Pass-through and Monetary Policy in Transition Economy: Evidence from Tunisia with disaggregated VAR Analysis," MPRA Paper 74179, University Library of Munich, Germany.
    2. repec:ers:ijebaa:v:iv:y:2016:i:4:p:50-63 is not listed on IDEAS

    More about this item

    Keywords

    Exchange rate Pass-through; domestic prices; short and long run analysis; Tunisia.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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