The Opportunities for Adopting Inflation Targeting in Tunisia: a Cointegration Study and Transmission Channels of Monetary Policy

Abstract

The major aim of this paper is to analyze, at a first stage, the trend of inflation in Tunisia, then to conduct an overview of inflation measures and, to develop a simple inflation forecasting by applying the Box and Jenkins (Time series analysis: forecasting and control. Holden day, San Francisco, 1976) method. It is essential to understand the dynamics of the core and global inflation, and to explore the relationships that may undermine cointegration inflation via the Engle and Granger (Econometrica 55:251–276, 1987) and Johansen (J Econ Dyn Control 12:231–254, 1988) methods on control variables during a recent monthly period, ranging from 1996 to 2006. Concerning the Tunisian case, and by retracing the similar study conducted by Ndiyae and Badji (Les determinants de l’inflation au Senegal: Approche par les fonctions de consommations, Agence nationale de la statistique et de la methodologie, 2008), the results have shown the existence of just a single cointegration relationship between the variables concerning a short term and long-term dynamics. Moreover, within the same spirit, a structural analysis based on structural VAR of Blanchard and Quah (Am Econ Rev 79:655–673, 1989) method has managed to identify the shocks impact on the supply and demand variables on the consumer prices index through the study of transmission channels of monetary policy. The outcomes have exposed that the relatively low impact degree of control variables on inflation in Tunisia is consistent with those carried out by Gupta and Komen (Time aggregation and the contradictions with causal relationships: can economic theory come to the rescue? 2008).