Credibility of Inflation Targeting in Morocco and Tunisia

Adel Boughrara, Mongi Boughzala () and Hassouna Moussa
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Mongi Boughzala: University of Tunis ElManar, Tunisia
Hassouna Moussa: Acadia University, Canada

No 448, Working Papers from Economic Research Forum

Abstract: Can the Moroccan and the Tunisian financial systems withstand the consequences of adopting IT, and is IT the appropriate monetary policy for them? There are many crucial requirements for the success of IT including independence of the central bank, fiscal discipline, a flexible exchange rate, and a strong and transparent financial system. Most of these requirements are actually important for any sound monetary policy. Not all of them are readily fulfilled in Morocco and Tunisia, some may be achieved gradually, eventually over a transition period, but there are some crucial prerequisite conditions that are not fulfilled. Absence of fiscal and financial dominance is one of them, and there are many other features not consistent with IT. We argue that, in spite of the many reforms they implemented Morocco and Tunisia fiscal and financial systems are not yet adequate for IT; in particular, the NPL problem undermines their effectiveness. The success of IT also depends on some institutional conditions that seem currently hard to meet, namely the government ability and willingness to establish a credible system ensuring fiscal and monetary discipline and central bank independence. Under the current conditions the government and the monetary authority may be reluctant to move to IT. The paper also presents a fairly simple dynamic simulation model taking into account some basic and specific features of the Moroccan and Tunisian systems. The simulations show that IT under the fragile current system may destabilize the economy and the target is likely to be missed when important exogenous (eventually external) shocks occur.

Pages: 34
Date: 2008-01-09, Revised 2008-01-09
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Published by The Economic Research Forum (ERF)

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