Tunisia Monetary Policy Since the Arab Spring: The Fall of the Exchange Rate Anchor and Rise of Inflation Targeting
IMF Working Papers, August 21, 2020
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- Tunisia Monetary Policy Since the Arab Spring: The Fall of the Exchange Rate Anchor and Rise of Inflation Targeting
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Bibliographic details
- Authors: Nicolas End, Mariam El Hamiani Khatat, Rym Kolsi
- Published: August 21, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513555027.001
Main argument and conclusion
- Inflation targeting could be the future of Tunisia’s monetary policy.
- Monetary targeting has proven to be ineffective due to:
- the composition of reserve money,
- structural liquidity deficit,
- higher instability of the money multiplier after 2010.
- Exchange rate targeting is no longer feasible due to:
- the level of international reserves,
- current account deficit,
- inflation differentials with main trading partners.
- The Central Bank of Tunisia has already made important progress toward inflation targeting.
Evidence and transmission mechanisms
- The paper provides evidence of:
- increasingly effective interest rate transmission;
- changing exchange rate passthrough to inflation associated with a gradual move toward further exchange rate flexibility.
- Key technical terms and mechanisms emphasized:
- interest rate transmission;
- exchange rate passthrough;
- money multiplier instability;
- structural liquidity deficit;
- reserve money composition.
Policy implications and recommendations
- Shift monetary policy framework toward inflation targeting given:
- limitations of monetary targeting;
- infeasibility of exchange rate anchoring under current external and domestic conditions.
- Continue reforms and implementation steps that strengthen interest-rate-based transmission and exchange rate flexibility to support inflation-targeting implementation.
Subject coverage and keywords
- Subjects: Central bank policy rate, Exchange rates, Financial services, Foreign exchange, Inflation, Monetary base, Monetary policy, Monetary policy frameworks, Money, Prices
- Keywords: central bank, Central bank policy rate, exchange rate, exchange rate passthrough, exchange rate targeting, Exchange rates, external shocks, foreign exchange interventions, implementation regulation, Inflation, inflation targeting, liquidity injection, Monetary base, monetary operations, monetary policy, monetary policy framework, Monetary policy frameworks, monetary policy implementation, monetary policy outcome, monetary policy rule, monetary policy tightening, monetary policy transmission, monetary transmission, money multiplier, pass-through coefficient, policy rate, Policy rate, Policy rate pass-through coefficient, rate, transmission mechanism, WP
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- Working Paper