Asymmetric behavior of exchange rate in Tunisia

A nonlinear approach

Abstract

The aim of this paper is to analyze the Tunisian exchange rate pass-through to inflation on quarterly data over the period 2011Q4 2019Q4. For this purpose we use a smooth transition autoregressive model, this nonlinear approach enables us to distinguish two regimes and determine both the threshold and the speed of transition between these regimes. Our results suggest the existence of significant short run causality between inflation, economic growth, real effective exchange rate and external debt growth. The non-linearity tests we conducted favors the logistic smooth transition autoregressive specification (LSTAR) which describes better the behavior of exchange rate pass-through to inflation in Tunisia during the last decade. We have also found evidence of high pass-through to inflation through external debt in both regimes. The policy implications we derive from our results are the inevitability of slowing down the external debt growth by mainly reducing government spending, increasing production and diversify exportation.