Exchange Rate Pass-Through and Inflation Dynamics in Tunisia: A Markov-Switching Approach

Abstract

This paper studies the effect of exchange rate pass-through on inflation in Tunisia for the period 2001 to 2009. The objective is to track inflation regimes for the Tunisian economy and to forecast its determinants. Using a Markov-switching approach, the authors identified two main regimes for inflation in Tunisia during this period: a low and stable inflation regime associated with a low pass-through level and a high inflation regime associated with a high pass-through level. To highlight the mechanisms underlying shifts in inflation regimes, the authors used a time-varying probabilities approach and identified a set of variables to assess their effects on inflation in Tunisia. The results show that the price level decreases in response to an increase in interest rates. Along with this, the empirical results provide strong evidence that the industrial production index has a negative and significant effect, as it increases the probability to stay in an inflationary regime and remain at a high pass-through level. The results also show robust support for the hypothesis that the imports increase the probability to stay in a high-inflation regime and maintain a high pass-through level. However, exports increase the probability of staying in a low-inflation regime and maintaining a low pass-through level. JEL G15 F3 F4

Exchange Rate Pass-Through in Brazil: А Markov Switching DSGE Estimation for the Inflation Targeting Period

“…Moreover, the nonlinear or asymmetric behaviour of exchange rate pass-through is verified in the empirical studies undertaken by Correa andMinella (2010), Nogueira Jr (2010) and Pimentel et al (2016). In other countries, Holmes (2009) and Khemiri and Ali (2013) assess regime switching in exchange rate pass-through by means of regressions based on the Phillips curve for New Zealand and Tunisia, respectively. Donayre and Panovska (2016) gather strong evidence of a nonlinear relationship between pass-through and economic activity for Canada and Mexico.…”

“…The rationale for this paper derives from the risk of underestimating the effect of an exchange rate shock to inflation when DSGE models are used. The international literature has found meaningful evidence of nonlinear exchange rate pass-through in several developing and developed economies (Albuquerque and Portugal, 2005;Correa and Minella, 2010;Holmes, 2009;Khemiri andAli, 2013, Donayre andPanovska, 2016;Baharumshah et al, 2017). However, to the best of our knowledge, there is no published work on the estimation of DSGE models allowing for non-linear exchange rate pass-through.…”

A visegrádi négyek országai főbb regionális gazdasági jellemzői

“…A munkahelyek növekedését célzó beruházási aktivitáshoz elengedhetetlen a jól működő bankrendszer és a bankkontrolling, biztosítva a feladataik megfelelő tervezését, növelve a bank potenciálját (Kalmár et al, 2015;Khemiri-Ben Ali, 2013). A gazdasági növekedés erőteljesen függ a magántársaságok tevékenységétől, amelyet az adópolitika szabályoz, így hatva a tevékenységükre.…”

Inflation and Market Uncertainty in South Africa

“…Two branches of literature need to be linked to consider the relationship between uncertainty and inflation through the exchange rate: the first focuses on the extent to which market uncertainty explains the exchange rate (see for example, Kumar and Persaud (), Cairns et al . () and La Marca ()); the second focuses on the exchange rate as a factor explaining the domestic inflation rate (see for example Kichian (), and Khemiri and Ali ()). Emerging market countries in particular might be susceptible to movements in risk perceptions of international investors.…”

“…Hence, the sale of the emerging market currency is the cause of domestic currency depreciation. Kichian (), and Khemiri and Ali () demonstrate how changes in the exchange rate feed through to changes in inflation. Specifically, they argue that a depreciation of the domestic currency puts upward pressure on imported inflation, while a rise in imported inflation may create an expectation that consumer inflation may increase.…”