Tunisia Monetary Policy Since the Arab Spring: The Fall of the Exchange Rate Anchor and Rise of Inflation Targeting

Tunisia Monetary Policy Since the Arab Spring: The Fall of the Exchange Rate Anchor and Rise of Inflation Targeting
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Volume/Issue: Volume 2020 Issue 167
Publication date: August 2020
ISBN: 9781513555027
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Topics covered in this book

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Banks and Banking , Inflation , Money and Monetary Policy , WP , monetary policy , exchange rate , central bank , rate , monetary policy framework , inflation targeting , monetary transmission , monetary operations , foreign exchange interventions , exchange rate passthrough , external shocks , liquidity injection , Policy rate , implementation regulation , policy rate , monetary policy transmission , monetary policy implementation , Central bank policy rate , Inflation , Monetary base , Exchange rates , Monetary policy frameworks , money multiplier , transmission mechanism , Policy rate pass-through coefficient , monetary policy outcome , exchange rate targeting , pass-through coefficient , monetary policy rule , monetary policy tightening

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Summary

In this paper, we argue that 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, and 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, and inflation differentials with main trading partners. The Central Bank of Tunisia has already made important progress toward inflation targeting. The paper evidences the existence of increasingly effective interest rate transmission as well as the changing exchange rate passthrough to inflation with the gradual move toward further exchange rate flexibility.