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Non-linear causality between exchange rates, inflation, interest rate differential and terms of trade in Tunisia

Non-linear causality between exchange rates, inflation, interest rate differential and terms of... PurposeThe purpose of this paper is to investigate the dynamic relationship between inflation, interest rate differential, the exchange trade and exchange rate parities, i.e. (USD/TND, EUR/TND and JPY/TND).Design/methodology/approachGiven the existing non-linear form between the different time series in this study, the empirical analysis is based on the using of non-parametric method such as the artificial neural networks. In order to detect the causality relationship between the variables, the authors use an NARX model.FindingsMixed results were found; there is a bidirectional relationship between inflation and exchange rate among others. Results also show that there is a strong correlation between the terms of trade and inflation, which says that trade openness increases the demand for imported goods and, therefore, causes more inflation for Tunisia.Originality/valueAfter these results, it is important for policymakers to know which factors influence exchange rate stability, especially in developing countries like Tunisia. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png African Journal of Economic and Management Studies Emerald Publishing

Non-linear causality between exchange rates, inflation, interest rate differential and terms of trade in Tunisia

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
2040-0705
DOI
10.1108/AJEMS-02-2017-0034
Publisher site
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Abstract

PurposeThe purpose of this paper is to investigate the dynamic relationship between inflation, interest rate differential, the exchange trade and exchange rate parities, i.e. (USD/TND, EUR/TND and JPY/TND).Design/methodology/approachGiven the existing non-linear form between the different time series in this study, the empirical analysis is based on the using of non-parametric method such as the artificial neural networks. In order to detect the causality relationship between the variables, the authors use an NARX model.FindingsMixed results were found; there is a bidirectional relationship between inflation and exchange rate among others. Results also show that there is a strong correlation between the terms of trade and inflation, which says that trade openness increases the demand for imported goods and, therefore, causes more inflation for Tunisia.Originality/valueAfter these results, it is important for policymakers to know which factors influence exchange rate stability, especially in developing countries like Tunisia.

Journal

African Journal of Economic and Management Studies – Emerald Publishing

Published: Sep 3, 2018

References

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