Broad Money Demand and Monetary Policy in Tunisia

The development of empirical foundations to the conduct of monetary policy in Tunisia is the central concern of this paper. Finding stable money demand functions for M2 and for M4, it concludes that monetary aggregates are an appropriate intermediate target of monetary policy in Tunisia and broadly corroborates the current approach to monetary policy of the Tunisian Central Bank. It finds, however, a lower income elasticity than the one currently applied by the Central Bank and proposes a different methodology for the definition of monetary growth targets. The paper also finds that both interest rates and reserve money are feasible operating targets and suggests that the Central Bank orients its monetary policy more towards transparent operating targets, so as to achieve a better control of the money supply