Targeting Inflation and Exchange Rate Management in Tunisia Before and After the Revolution

Abstract

This paper investigates the dynamic links between the exchange rate and inflation in Tunisia, using annual data during the 1984/2016 period. First, we implement a unit root analysis to test stationarity. This study makes use of both primary and secondary data and VAR Granger Causality/Block Erogeneity Wald Tests were adopted as estimation techniques. Granger causality results revealed that there is a unidirectional causal link between inflation and the exchange rates running from inflation to the exchange rates and that these exchange rates have no impact on inflation. This study provides some implications regarding potential constraints on the 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.