Exchange rate pass-through to domestic prices in Tunisia: a short- and long-run analysis

Abstract

This study analyses the impact of the exchange rate fluctuations in the short and long-run in Tunisia under a pure commitment policy through two channels. The first is the structural vector autoregression (SVAR) used to analyse the short run effects of the exchange rate on the industrial production index and on the consumer and import price indexes. The second is the vector error correction model (VECM) used to examine the long-run dynamic effects of the exchange rate upon the same variables relying on Tunisian monthly data during the period from January 1993 to June 2011. Unlike several empirical studies, the exchange rate is found to be a potential source not only of production but also of inflation reduction in Tunisia. Indeed, the direct channel of the exchange rate seems to have a significant impact on production and inflation in the long-run, whereas the indirect one has no effect on the money supply.

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