Real exchange rate misalignments and economic growth in Tunisia: New evidence from a threshold analysis of asymmetric adjustments

In this paper, we focus on both the impact of real exchange rate (RER) misalignments on economic growth and the assessment of misalignments’ thresholds in the case of Tunisia. Our contribution to the literature is threefold. First, we reassess the main factors driving the equilibrium RER using a dynamic model approach. Second, we investigate the possible asymmetric effects of real misalignment on economic growth in Tunisia using the non-linear autoregressive distributed lag (NARDL) estimator developed by Shin et al. (2014) which takes into account the nonlinearity in the relationship between exchange rate misalignments and economic growth. Third, using a threshold model inspired by Hansen (2000), we identify the level of misalignments of the Tunisian dinar that can enhance (or hamper) economic growth. Our main findings are the following: i) the Tunisian dinar has experienced periods of overvaluation and undervaluation during the 2001–2016 period; ii) there is a negative impact of real overvaluation of the dinar on Tunisia’s growth performance, while an undervaluation has no significant impact; iii) there exists a threshold for the effects of RER misalignment on growth. Specifically, real undervaluation promotes growth until an estimated threshold of 10.02% deviation from the equilibrium RER has been reached, while an overvaluation can boost growth until a 9.02% threshold is reached. These findings have important implications from a policymaker’s perspective.(This abstract was borrowed from another version of this item.)