Journal Article

No. 2013-43 | December 18, 2013
Exchange Rate Pass-Through and Inflation Dynamics in Tunisia: A Markov-Switching Approach PDF Icon

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 Classification

G15 F3 F4

Citation

Rim Khemiri and Mohamed Sami Ben Ali (2013). Exchange Rate Pass-Through and Inflation Dynamics in Tunisia: A Markov-Switching Approach. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 7, 2013-43. http://dx.doi.org/10.5018/economics-ejournal.ja.2013-43

Assessment

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Comments and Questions


Laurence Copeland - endogeneity and other problems
January 02, 2014 - 19:59

This paper needs to start with a clearer statement of its focus. As it stands, it is unclear what is its value-added relative to the existing literature (apart from a focus on Tunisia rather than USA, Europe...). In addition, as the paper progresses and we reach discussion of the results, ...[more]

... there seems to be a shift from a narrow focus on exchange rate pass-through to the broader question of what factors cause inflation.
In general the authors need to think more about the theoretical background. There is no mention of any of the parity relationships – purchasing power parity, the open- and closed-economy Fisher equations – which would be expected to crop up at some point. Thus, the single equations actually tested here are potentially riddled with endogeneity problems. (“Simply ignoring such simultaneity, as is often done in single equation approaches, would result in simultaneous equation bias” Ca’Zorzi et al (2007), cited in the biblio – they use VAR’s for this reason). For example, what is going on with the interest rate link? What is the true direction of causation? (The authors take for granted that interest rates cause inflation, discounting the opposite possibility without any apparent testing). Statements like “This reference rate remained….fixed….to enhance the attractiveness of the Tunisian economy” (p. 13) do not help in this regard.
Also, in a nonspecialist journal, most readers will know little about the Tunisian economy. The authors should provide a para or two of background for their benefit, touching on whether any goods prices and interest rates are or were controlled over the data period, what proportion of the economy is industry rather than agriculture or services (relevant to the use of the index of industrial production as a GDP proxy) and so forth.


Editorial points
Tables 3a and others have unlabelled columns.
Choudhri and Hakura referenced twice, also journal name wrong (JIMF, not IJMF)