Inflation-threshold effect on current account imbalance in Tunisia: new evidence from a nonlinear approach

Abstract

PurposeIn this article, we assess the impact of inflation on the current account balance in the case of Tunisia, covering the period 1976–2022.Design/methodology/approachThe study utilizes a threshold regression approach proposed by Hansen (2001) in a bid to identify inflation threshold values.FindingsThe results show two inflation threshold values (3.87% and 8.41%), which determine three inflation regimes in the case of Tunisia. In lower inflation regimes, inflation has a positive and statistically significant impact on the current account balance. However, in higher inflation regimes, where inflation rates exceed 3.87%, there is a negative and statistically significant correlation with the current account balance, resulting in a deficit.Originality/valueThe research suggests the need for a new policy approach that considers these threshold levels to address high inflation rates, which currently stand at approximately 11%, and aims to restore them to the targeted rate of 4%. This necessitates coordinated monetary and fiscal measures.