Tranmission Of International Shocks To An Emerging Small Open-Economy: Evidence From Tunisia

This paper examines how international monetary shocks are transmitted to emerging market countries like Tunisia. A long-standing empirical literature on the transmission of international shocks was mainly based on small-scale structural VAR approach. This paper proposes a Factor-Augmented VAR (FAVAR) model to select the main determinants of the Tunisia’s economy and assess the response of Tunisia’s macroeconomic variables to international fundamental variables. In particular, we aim to analyze the impact that world shocks may have on the Tunisian economy following the 2008 international financial crisis. This specification allows exploiting a wide range of variables that could influence the conduct of the monetary policy as well as spur the transmission mechanism of external monetary shocks to the national economy. We are mainly interested in specific sources of shocks, such as unanticipated fall in the global economic activity, in interest rates and in commodity prices. Our approach relies on a large panel of data covering Tunisia and 10 European and industrialized countries including Tunisia, and 211 price, activity and money indicators. Our results show that the Tunisian economy is highly exposed to the shocks of foreign economic activity and commodity prices and, to a lower extend, to shocks of foreign interest rates and world inflation. Our findings also suggest that international shocks are transmitted to Tunisia's national economy through real channels.