Monetary policy and inflation targeting under global uncertainty: a SVAR approach for Tunisia

Abstract

PurposeThe implementation of monetary policy by the central bank is an ongoing topic of discussion. This paper aims to explore monetary policy transmission shocks in times of uncertainty using the new World uncertainty index (WUI). The authors investigate the impact of crises, wars and pandemic shocks on selected macroeconomic variables.Design/methodology/approachThe authors use unit root tests, structural vector autoregressive model and the Granger causality test according to Toda–Yamamoto with quarterly data over 1999–2022.FindingsThe results of this study show that in the short run, there is a unidirectional relationship between the money market rate and WUI, while the relationship between the latter and the money supply (M2) is bidirectional. The short-term effect runs from WUI to inflation. In the long run, the variance decomposition shows that global uncertainty explains around 12% of inflation pressures. The uncertainty caused by special events in the world creates positive shocks on inflation in Tunisia, which decreases the ability of the central bank to control inflation.Research limitations/implicationsThe results have implications over necessary and urgent actions to be implemented for a progressive economic recovery but point to a necessary transition to an inflation-targeting regime.Originality/valueExamining monetary policy under uncertainty is a recent phenomenon. The authors purposely use a novel WUI by Ahir et al. (2022) that is unexploited in literature.