Economic Challenges and Opportunities after the Revolution in Tunisia: Inflation and Exchange Rate

Abstract

This paper investigates the dynamic links between the exchange rate and the inflation in Tunisia, using annual data during the period 1984–2016. First, we implement unit root analysis to test the stationary. The study makes use of both primary and secondary data and VAR Granger Causality/Block Erogeneity Wald Tests were adopted as the estimation techniques. Granger causality results reveal that there is a unidirectional causal link between the inflation and exchange running from the inflation to the exchange rate and that the exchange rate has no impact on inflation. This study provides some implications regarding potential constraints on monetary policy. A policy of inflation targeting, as an alternative monetary policy, combined with a compatible regime of flexible exchange rates could provide a solution to this dilemma.