Sources of macroeconomic fluctuations in Tunisia: a structural VAR approach

This study focuses on modeling the main sources of macroeconomic fluctuations in real production and inflation in Tunisia. We considered a set of major macroeconomic variables, including the real output, the price level, the real exchange rate, the money market rate, and the money supply as domestic variables and European industrial production as an external variable. Our analysis is based on the structural vector autoregressive (SVAR) model with monthly data from 1993 to 2019. This paper begins with an illustration of the structural change problem in the VAR model. Firstly, as suggested by Lee and Strazicich (2004) and Gregory and Hansen (1995), respectively, the results of the stationary and co-integration tests with the assumption of a structural break showed that the studied time series are integrated but not co-integrated. Secondly, we tested the statistical significance of the eventual breakpoints corresponding to the two major events, namely, the 2011 Tunisian revolution and the 2008 sub-prime crisis, which occurred over the studied period. In fact, we intended to use the dummy variables for these crises as exogenous variables, while the hypothesis of a structural break in the VAR system, which was tested using the likelihood-ratio test (LR), was rejected. Finally, empirical SVAR model estimates indicate that real supply shocks, which account for 60% of output variation for the national economy, are the main contributor to the real production fluctuations. However, despite the traditional wisdom, this study asserts that external shocks, reflected by foreign demand, have a minimal impact on the national economy. Furthermore, our results show that the monetary demand shocks are the main drivers of price fluctuations, explaining almost 60% of the inflation variance, while the monetary supply and policy shocks do not play a significant role in inflation, as they contribute just 1.44% and 0.16%, respectively, which confirmed the failure of the monetary aggregate as an intermediate target to ensure price stability. In view of our findings, the study provides some policy implications for policymakers to minimize undesirable macroeconomic instabilities in Tunisia. Future researchers were also presented.