Modelling monetary transmission in less developed emerging markets: the case of Tunisia

This paper exploits a case study of a country belonging to a group of less developed emerging markets (LDEMEs). This group has features which challenge standard New-Keynesian (NK) assumptions. These are: underdeveloped and shallow financial market, uncompetitive labour market, informal economy, weak institutions, problematic central bank independence, state ownership and controls, monetary policy targeting multiple variables. To overcome problems which might arise from using standard models, the paper proposes a complex strategy of modelling monetary transmission in LDEMEs: (i) SVARs which reflect the central bank’s simultaneous recourse to multiple policy instruments and targets, and (ii) NK structural models, which capture such features as an immature financial market, exchange rate interventions, and price subsidies. This way, a range of possible reactions of basic macroeconomic variables to monetary policy instruments is obtained. Such approach, combining multiple econometric techniques, reduces uncertainty concerning specification, parameters and equilibria.