A Monetary Conditions Index and its Application on Tunisian Economic Forecasting

The main purpose of this article is to find out the extent of the influence of internal and external monetary conditions on Tunisian macroeconomic aggregates by constructing a synthetic index. Our contribution is, firstly, to calculate the weights assigned to domestic interest rate and the exchange rate based on the estimated coefficients respectively for these two indicators over the period 1965-2015. Secondly, based on the VAR model, we confirm the long-run dynamic between the selected variables. The analysis of shocks indicates that monetary conditions have a particular importance via their influence on economic activity and inflation. The latter is characterized by its significant negative impact on economic growth and by its contribution in linking between internal and external interest rates. Thirdly, we attempt, through a SVAR model, to examine the short run structural dynamics between the selected variables. Results reveal that the Tunisian economy is highly influenced by external monetary conditions. This influence is demonstrated through the dynamics of structural monetary policy shocks and exchange rate. In conclusion, our findings reflect that the exchange rate plays an increasing role in transmitting the monetary policy effect to the inflation rate and thus the real economy.