A Study of the Regime Switching in the Relationship between the Tunisian Exchange Rates and the Fundamental Economic Variables: A Further Investigation Using the Threshold Cointegration Theory

Abstract

This paper introduces the regime switching models considered when determining the long run relationships between the Tunisian effective exchange rate and economic fundamentals over a period of 30 years. We employ the threshold cointegration approach in order to investigate the long run non-linear dynamics of the effective exchange rate. We introduce the threshold error correction model (TECM) to illustrate the discontinuity of the convergence process towards the long run equilibrium situation. The obtained results confirm the discontinuous or asymmetrical character of the trajectory of the Tunisian dinar towards its fundamental situation depending on whether Tunisia exchange rate is under - or overvaluation regimes. In addition, structural shifts from selected economic variables, may characterize this discontinuity in the convergence process.