Relationship between the Exchange Rate and Macroeconomic Instability Before and After the Tunisian Revolution

Abstract

The year 2011 has been marked as a major turning point in the Tunisian modern history from different perspectives. The popular uprising and the fall of the former regime in January led the country into a period of political and economic instability that has notably affected the national stock market. In this respect, the present study aims at investigating the dynamic links between the yield on the stock index and the macroeconomic instability in an environment characterized with political uncertainty. \nIn a bid to analyze the political uncertainty’s impacts on the stock market and on the macroeconomic aggregates, mainly on the inflation and the exchange rate before and during the 2011 revolution, we consider it useful to implement an empirical testing on the nature of interaction binding these associated variables. To this end, a specified an error correction model is estimated to examine the period 1984-2016, to help highlight the short and long-term effects associating the considered variables. \nThe reached results proved to indicate that the Tunisian Dinar (TND) exchange rate remains noticeable the variable which continued to undergo an adjustment process following the inflation and the political uncertainty related dynamics. The financial indicator “Tun-Index” is discovered to be not only weakly exogenous, but also closely associated with a “rate of endogeneity” that stands as noticeably lower than the exchange rate. In effect, the strong inflation the state had with eased throughout the economy during period 2012-2016 entailed remarkable devaluations of the TND to take place. Actually, such a significant devaluation turns out to have its exploration in the political uncertainty predominates the state affairs.