Unveiling Extreme Dependencies between Oil Price Shocks and Inflation in Tunisia: Insights from a Copula Approach

Abstract

We follow a non-linear dynamic correlation approach using a combination of a DCC-GARCH model and a copula model to capture the dependence between oil price changes and inflation in Tunisia. The case of Tunisia is particularly instructive since after having been an exporter and a major producer, it became a net oil importer in the 2000s. The study, based on monthly data spanning decades, selects a Gumbel copula and shows that beyond weak average dependencies, there is a strong correlation between extreme values, suggesting that inflation in Tunisia is more sensitive to extreme (positive) variations in oil prices than to average variations. The implications of these empirical results for economic policy are crucial for the Tunisian economy.Copyright© 2024 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.