Modelling Less Developed Emerging Markets: The Case of Monetary Transmission in Tunisia

Abstract

Our paper is a case study devoted to a country which belongs to a group of less developed EMEs (LDEMEs), not depending on natural resources. In spite of many features which distinguish such countries from developed market economies, they are frequently modelled basing on assumptions which are better-suited for mature economies, e.g. New Keynesian DSGE models. From the point of view of monetary transmission analysis, the most important distortions which make LDEMEs special are: underdeveloped shallow financial markets, uncompetitive labour market, informal economy, weak institutions, problematic central bank independence, state ownership and controls, especially of prices and in the financial sector. In the paper we propose a complex way of proceeding in modelling the LDMEs, starting from the stylized facts and assessment of a distance of the modelled economy from theoretical assumptions and pointing at the most problematic sectors, through structural VARs providing reactions to shocks with a relatively small number of assumptions, to a suite of structural models, estimated with classical and Bayesian methods, to have a range of possible reactions. We show that to be applicable, the standard NK models need to be adjusted with specific features of LDEMEs.