📈 economics

Exchange rate regime and economic growth in Tunisia

This study analyzes Tunisia's 1982–2014 data to conclude that while a relationship exists between the exchange rate regime and economic growth, it negatively impacts the trade balance, despite encountering statistical challenges such as multicollinearity and non-stationarity in the trade balance variable.

Original authors: Firas Kadri MAAROUFI OUERTANI

Published 2026-09-25

📖 5 min read🧠 Deep dive

CC BY 4.0

Original authors: Firas Kadri MAAROUFI OUERTANI

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Money is more than just coins and bills; it is a language that nations speak to one another, and the price of that language is the exchange rate. When a country decides how to set this price, it chooses an exchange rate regime. Some nations lock their currency's value to another, like a ship tied to a dock, hoping for stability. Others let their currency float freely, rising and falling with the tides of global trade. For decades, economists have debated which approach helps a country grow richer. Does a fixed price protect a nation's economy, or does a flexible one allow it to adapt to shocks? This question is not just theoretical; it determines whether a country can create jobs, attract investment, and improve the standard of living for its people. In the Mediterranean, Tunisia has spent decades navigating these waters, shifting its strategies as the global economy changed, offering a unique case study for understanding how currency choices shape economic destiny.

A researcher at Tunis El Manar University, Firas Kadri Maaroufi Ouertani, decided to look closely at this history to see if there is a clear link between how Tunisia managed its money and how its economy grew. He focused on the years between 1982 and 2014, a period that saw the country move from a rigid system to a more flexible one. To do this, he gathered a vast amount of data from international organizations like the World Bank and the International Monetary Fund. He looked at the size of the country's economy, measured by its gross domestic product, and compared it against three other key factors: the real value of the Tunisian dinar compared to other currencies, the balance of money coming in and going out from trade, and the amount of foreign investment pouring into the country. By using statistical tools to analyze these numbers, he aimed to see which factors truly drove growth and which ones were merely noise.

The analysis began by checking how these different economic variables moved together. The researcher found that they were indeed linked, but in a way that made the math tricky because they often moved in the same direction at the same time. Despite this complexity, the model he built told a clear story about what mattered most. The most powerful driver of economic growth was foreign investment. When money from abroad flowed into Tunisia, the economy grew. The data showed that a small increase in foreign investment led to a significant boost in the country's overall wealth. This suggests that when international investors feel confident, they bring capital that fuels development.

However, the story of the currency itself was more complicated. The study found that when the real value of the Tunisian dinar went up, the economy actually slowed down. A stronger currency, which might sound like a sign of strength, was associated with a drop in economic growth in this specific context. This happened because a stronger currency makes a country's exports more expensive for other nations to buy, which can hurt the businesses that rely on selling goods abroad. Interestingly, the trade balance—the difference between what the country sells and what it buys—did not show a statistically significant link to growth in this model. While the country ran a trade deficit, meaning it imported more than it exported, this specific number did not appear to be the main engine or brake for the economy's overall speed during this period.

The researcher also checked the data for errors and patterns that might have skewed the results, ensuring the findings were solid. He confirmed that the time series data was reliable and that the statistical relationships he found were not just random chance. The final picture that emerged was one of a delicate balance. The study concludes that there is a definite relationship between how Tunisia managed its exchange rate and how its economy performed. The most successful approach, the data suggests, was a managed float. This is a system where the currency is allowed to move, but the central bank steps in when necessary to keep things stable. It is a middle path that avoids the rigidity of a fixed rate and the chaos of a completely free-floating one.

The implications of this research are significant for a country that relies heavily on trade with Europe and the rest of the world. The findings suggest that if the monetary authorities fail to maintain a stable and competitive exchange rate, the economy pays the price in slower growth. The study does not claim to have solved every mystery of the Tunisian economy, especially given the political upheavals that occurred after 2011, but it provides a clear, data-driven map of the past. It shows that while foreign investment is a vital fuel for growth, the price of the national currency must be managed with care. Too strong, and it chokes off exports; too weak, and it invites inflation. The path to prosperity, according to this analysis, lies in a steady hand that guides the currency, allowing it to adjust to the world without losing its footing.

Technical Summary: Exchange Rate Regime and Economic Growth in Tunisia

Problem Statement
The paper addresses the ongoing theoretical and empirical debate regarding the relationship between exchange rate regime choices and economic growth. While some literature suggests a positive link between specific regimes and economic performance, others argue the relationship is unclear or non-existent. The study specifically investigates this dynamic within the Tunisian economy over the period 1982–2014. The central research questions are whether a relationship exists between the exchange rate regime and economic growth in Tunisia and, if so, what the sign and magnitude of this relationship are. The analysis is situated within the context of Tunisia's historical monetary shifts, moving from pegs to the French franc and Deutsche Mark to a basket of currencies, and eventually adopting a more flexible policy post-2000.

Methodology
The study employs a time-series regression model approach using annual data from 1982 to 2014, sourced from the World Bank, UNCTAD, and the IMF. The empirical model is inspired by the work of Rizzo (1998) and is specified as follows:

$\text{Log}(\text{GDP}_t) = \alpha + \beta \text{Log}(\text{REER}_t) + \gamma \Delta \text{TBV}_t + \lambda \text{Log}(\text{FDI}_t) + \varepsilon_t$

Where:

Dependent Variable: $\text{Log}(\text{GDP}_t)$ , representing the natural logarithm of GDP per capita (constant US dollars).
Independent Variables:
- $\text{Log}(\text{REER}_t)$ : The natural logarithm of the Real Effective Exchange Rate index (2010=100).
- $\Delta \text{TBV}_t$ : The annual change in the Trade Balance Value (in millions of US dollars).
- $\text{Log}(\text{FDI}_t)$ : The natural logarithm of Foreign Direct Investment inflows (in millions of US dollars).

The analytical procedure involved:

Descriptive Statistics and Correlation Analysis: To assess variable distributions and identify multicollinearity.
Stationarity Testing: Utilizing the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests to determine if the time series data are stationary.
Regression Estimation: Ordinary Least Squares (OLS) to estimate the model parameters.
Diagnostic Testing: The Durbin-Watson test was applied to check for autocorrelation in the residuals.

Key Results

Descriptive Statistics: The variables did not follow a reduced centered distribution. While most variables exhibited low variance, the Trade Balance Value showed high variance. Correlation analysis indicated strong relationships between variables, confirming the presence of multicollinearity.
Stationarity: The ADF and Phillips-Perron tests confirmed stationarity for $\text{Log}(\text{GDP}_t)$ , $\text{Log}(\text{FDI}_t)$ , and $\text{Log}(\text{REER}_t)$ at various significance levels. However, the study noted a lack of stationarity for the Trade Balance Value ( $\Delta \text{TBV}_t$ ).
Regression Estimates: The overall model was statistically significant ( $F(3, 29) = 91.39$ $F (3, 29) = 91.39$ , $p = 0.0000$ $p = 0.0000$ ) with a high coefficient of determination ( $R^2 = 0.9043$ $R^{2} = 0.9043$ ).
- FDI: $\text{Log}(\text{FDI}_t)$ was positive and significant at the 1% level. A 1% increase in FDI was associated with a 0.26% increase in GDP.
- REER: $\text{Log}(\text{REER}_t)$ was negative and significant at the 1% level. A 1% increase in the real effective exchange rate was associated with an 88% decrease in GDP, indicating a strong negative impact of exchange rate appreciation on growth.
- Trade Balance: The variable $\Delta \text{TBV}_t$ was found to be statistically insignificant.
Diagnostic Checks: The Durbin-Watson statistic was 0.995, which the author interprets as verifying the absence of autocorrelation errors in the time series data.

Key Contributions and Claims
The paper contributes to the literature by providing empirical evidence specific to the Tunisian context, a developing economy with a history of shifting exchange rate policies. The study concludes that:

There is a demonstrable relationship between the exchange rate regime and economic growth in Tunisia.
The real effective exchange rate has a significant negative impact on economic growth, suggesting that a competitive (depreciated) real exchange rate is favorable for growth in this context.
Foreign Direct Investment acts as a positive driver for growth.
Despite the negative impact on the trade balance, the exchange rate regime remains a critical determinant of economic performance.

Significance and Conclusion
The author asserts that the findings highlight the necessity for monetary authorities, under the supervision of the Tunisian Central Bank, to maintain parity agreements to ensure economic stability. The paper posits that failing to respect these agreements could result in weaker economic growth.

The study concludes that a "managed float" with appropriate central bank intervention is the most favorable exchange rate regime for Tunisia. This conclusion is drawn from the observation that Tunisia has historically been a model of economic success, though the inherent weaknesses of its development model were exposed following the 2011 revolution. The paper emphasizes that while the exchange rate regime influences growth, the specific dynamics in Tunisia require a balance between flexibility and managed intervention to preserve competitiveness and avoid balance of payments crises.

Technical Summary: Exchange Rate Regime and Economic Growth in Tunisia

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