Fahima Charef and Fethi Ayachi
The 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…
Abstract
Purpose
The 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/approach
Given 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.
Findings
Mixed 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/value
After these results, it is important for policymakers to know which factors influence exchange rate stability, especially in developing countries like Tunisia.