Title: Equilibrium exchange rate and exchange control level: an empirical analysis using a time-series cointegration VAR model (the case of Tunisia)

Authors: Ben M'Barek Hassene, Ben Romdhane Hager

Addresses: Faculty of Economic and Management Sciences, University of Tunisia, Tunis, Tunisia. ' Faculty of Economic and Management Sciences, University of Tunisia, Tunis, Tunisia

Abstract: The aim of this paper is to determine an equilibrium level of real exchange rate in an emerging country like Tunisia. The use of cointegration tests has shown the existence of a long-run equilibrium relationship between real exchange rate and economic fundamentals. One of the instruments that allowed us to capture the instability of these coefficients is the SupF test. This test has pointed to the significant effects of the different exchange control levels on long-run equilibrium. To attest for exchange control effect on long-run equilibrium, and even short-run adjustment dynamics, we have estimated a time-series cointegration VAR model. We found out that the relationship between long-run equilibrium and adjustment dynamics is moderated by exchange control levels| effects practised by local authorities. Furthermore, we proceeded to an evaluation of exchange interventions performances through comparing a set of observations of the evolution of the real exchange rate of the Dinar vs. the Euro for the period 2002–2008, expressing an increase in predictions estimated through a simulation of exchange dynamics using the error correction model over the period 1979–2001.

Keywords: equilibrium exchange rates; exchange control levels; SupF tests; time-series variables; cointegration; VAR models; Tunisia; emerging countries; equilibrium relationships; economic fundamentals; long-run relationships; instability; coefficients; long-run equilibrium; adjustment dynamics; short-run dynamics; local authorities; exchange interventions; Dinar; Euro; currencies; money; currency; error correction; financial services management.

DOI: 10.1504/IJFSM.2011.038326

International Journal of Financial Services Management, 2011 Vol.5 No.1, pp.21 - 33

Available online: 28 Jan 2011 *

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