WHAT DO WE KNOW ABOUT MONETARY POLICY

AND TRANSMISSION MECHANISM IN MOROCCO

AND TUNISIA ?
By

Adel Boughrara

University of the Center - Faculty of Law and Economic and Political Studies
Cité Erriadh - 4023 SOUSSE - TUNISIA
E-Mail : adel.boughrara@topnet.tn
Fax: 216 73 239 291 – Phone: 216 73 332 935

Abstract

This paper studies the monetary transmission mechanisms in Morocco and in Tunisia. It examines the
channels through which monetary policy shocks propagates. The empirical results point to the fact
that the two countries economies are endowed with different prevailing channels. It was shown that
the monetary channel is the dominant one in Tunisia, whereas the exchange rate channel seems to be
to more important in Morocco. It stands out also from the empirical results that the lending channel is
active neither in Morocco nor in Tunisia ; this rather unexpected result is rooted in different structural
and intuitional factors that differs from one country to another. Our analysis highlights the difficulties
that Moroccan monetary authorities face when conducting its monetary policy under the present
exchange regime. The paper concludes also that when it comes to monetary strategies favouring the
credibility construction (namely monetary targeting strategy or an inflation targeting), the Bank Al-
Maghrib will be not only forced to increase the dependence of the banking system vis-à-vis its
monetary instruments but also to change its policy exchange by moving towards more flexible
exchange rate. Besides, this paper results point also to the fact that Central bank of Tunisia can still
implement the monetary targeting strategy provided that the demand for intermediary aggregate turns
to be stable. Otherwise, it would be judicious to move to inflation targeting strategy. The paper ends
by putting forwards some guidelines to be followed.

Key Words: Monetary policy; Exchange Policy; VAR modelling; Morocco; Tunisia.

J.E.L. Classification : E40; E52; E58; E60.

(Preliminary Draft)

Paper submitted to
The 10th Annual Conference of the Economic Research Forum (ERF) to be held in
Marrakech – Morocco – December 18-21, 2003

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1. Introduction

Enormous benefits from economies of scale, combined with powerful globalisation

pressures, have increasingly convinced many countries in different parts of the world to
cooperate with each other and organize themselves into groups. Examples of economic
integration include the European union (EU) in 1991 between 11 European countries; the
North American Free-Trade Agreement (NAFTA) between United States, Canada and
Mexico in 1994. Since its inception in February 1989, the Arab Maghrebian Union (AMU)
has similarly aimed at several objectives, including coordinating economic policy among the
five member states (Algeria, Libya, Morocco, Mauritania, and Tunisia); gradually ensuring
free trade between them; and strengthening economic and financial linkages across all sectors
in the region. Despite the obvious appeal of regional integration, its potential economic and
financial benefits for member states, and despite the numerous multilateral agreements and
summits of the Heads of States of the five Arab Maghrebian countries since 1989, there has
been no progress’ towards achieving the objectives of the AMU. Indeed, a genuine
integration between the five Arab Maghrebian countries remains essentially diagrams and
dreams. Of course, this apparent failure may be rooted in many factors; perhaps chief among
them are economic and political impediments.

This paper will not seek to explain reasons of the failure; instead, it will try to check whether
the main leading countries’ economies in the region, namely Morocco and Tunisia, share
some similarities, in terms of monetary transmission mechanisms (MTM), that are likely to
facilitate their future monetary and economic integration. The choice of these two countries
is not fortuitous; they share many historical, cultural, political and economic resemblances.
They were also at the forefront of financial and monetary reforms in the MENA region. They
have been undertaking reforms of their financial sector as a part of a broad macroeconomic
adjustment program and structural reforms since 1986. These programs aimed mainly at
liberalising interest rates, improving banking supervision and introducing more market-based
instruments of monetary policy. The conduct of monetary policies in the two countries has
altered; their central banks1 have been seeking to preserve their money value and to stabilise
their exchange rates. This is consistent with the growing support among academic
economists and central bankers for making price stability the central long-run objective of
monetary policy (Svensson, 1999 and Bernanke et al ,1999). The stability-oriented monetary
policy strategy is the framework adopted by the Tunisian monetary authorities to achieve
price stability (Boughrara,2001,2002; Treichel,1997), while the Moroccan monetary
authorities preferred an exchange rate targeting in order to reach its goals (Tazi,1999; Karam,
2001).

The monetary and economic union implies a considerable change in the monetary and the
fiscal policy design. Consequently, as far as the monetary policy is concerned, economists
and policy makers has to focus on the appropriate monetary policy strategy (monetary
targeting, inflation targeting, etc.) that a “common” future central bank should pursue
following the launch of the single currency. Nonetheless, this step should be preceded by an
identification task: The identification as well as a deep understanding of the monetary
transmission mechanisms -the issues of timing and size- is likely to enlighten policymakers
about the effectiveness of their monetary actions. But, if the transmission mechanisms are

1
Central Bank of Tunisia (CBT) and Bank Al-Maghrib (BAM).

2
different, the future “common” central bank will find it hard to reach its pre-fixed goals by
means of its selected monetary policy. A “common” monetary decision might indeed trigger
different propagation effects in such a way that the final outcome will be fruitless.

A Possible future monetary integration between Morocco and Tunisia ought to prompt
significant interest in the study of structural and institutional differences in their national
financial systems and, consequently, the transmission mechanism of monetary policy in each
country. There is a wide consensus between economists that a better understanding of the
monetary transmission mechanism is very important; it helps central banks to determine the
proper motive of monetary policy to keep inflation within a desirable range. The
identification of the nature of the shocks that impact the economy help a lot central bankers
to choose the most relevant monetary strategy. Many economists (Poole,1970; Svensson
2000) pointed out to the fact that the selection of the monetary strategy should be contingent
on the nature of the shocks affecting the countries’ economies.

Many reasons motivated this research: First, despite its strategic importance and emergency,
the MTM in Morocco and Tunisia received little interest among economists (unlike the GCC
countries, for instance). There is indeed a lack of studies dealing with this theme. That’s why
we believe that this kind of studies allows policymakers to gain an insight into the
characteristics, specificities, resemblances, dissemblances, of the MTM’s nature of these two
countries; by the same way, it contributes to enlighten Moroccan and Tunisian policymakers
on the possibility of a future monetary union. Therefore, seeing that the understanding of the
transmission mechanisms of the monetary policy- especially the time lag involved between a
policy and its impact on inflation and output- is the key to the successful conduct of
monetary policy, one should still wonder which is the most important channel; is there only
one channel ? what makes this channel more prevailing ? The answers to all these questions
will greatly enlighten policy maker when implementing them.

Second, considering that we live in a changing world and considering that all the region
countries are witnessing a lot of financial and monetary reforms; they are consequently
facing some serious difficulties : on the one hand, the two countries witness an increase in
trade and capital account liberalisation which may induce the volatility of capita inflows; on
the other hand, the Moroccan and Tunisian economies are exposed to a lot of exogenous
shocks (supply, demand, changes in terms of trade, securities issues,…); their labour markets
as well as their nominal wages are rigid. Given these difficulties and constraints, the choice
of an irrelevant monetary policy strategy and/or an exchange regime will worsen their
economic situation and consequently will lead the countries to a disastrous situation;
therefore, we do believe that a deep understanding of the MTM -not the action of the
monetary authorities but also their reaction towards the economic situation- will substantially
lower the economic cost associated to the choice of the policy.

2. Monetary Policy and its Transmission Mechanisms : An overview.

There is by now a wide consensus among economists that monetary policy is neutral in the
long run but it does affect real economic activity in the short run. Recent evidence also shows
that these output effects can last for more than two years in some cases (Bernanke and
Blinder, 1992). There is, however, considerable disagreement on how monetary policy is
conveyed to the real economy. Clarifications to that issue are given by the monetary
transmission mechanism that is defined as the process by which changes in monetary policy
decisions are transmitted into changes in economic growth and inflation (Taylor, 1995). In

3
most industrialised countries, central banks monetary procedures have converged to control
money market interest rates, and consequently monetary policy decisions are modelled as
changes in the short-run interest rate by the central bank (Leeper, Sims, and Zha, 1996).
These changes affect aggregate demand through a large set of variables, including the real
cost of capital, the real exchange rate, income, wealth, and credit availability; in other words,
this rather complex mechanism operates through various channels and involves the behaviour
of all sectors of the economy. There is a long list of comprehensive surveys of the monetary
transmission process available in the literature. A few notable contributions in this area are
by Mishkin (1996), although this is by no means an exhaustive list. Numerous recent studies
have focused on this issue of transmission channels and their links with financial system.
Three different channels are commonly considered.

• The traditional money view: According to this view2, the effects of monetary policy are
felt through the demand for money and the short term interest rate, which affects investment
and output. This view can be described with an IS-LM model augmented with a supply side.
This class of models is characterised by the assumption that money and bonds are the only
relevant financial assets. The stylised transmission process according to this view is as
follows. Monetary policy actions change the nominal short-term interest rate by changing the
nominal money supply. This change is transmitted to the real long-term interest that is
relevant for investment decisions of firms as well as for certain consumption decisions
(durable goods, for example). A restrictive monetary policy shock that increases nominal
short-term interest rate increases the real long-term rate. Subsequently, investment and
consumption spending decrease and total output decreases, too. In sum, in this traditional
money view, monetary policy works through income and substitution effects; the exchange
rate provides additional leverage to the policy maker by strengthening strengthen the
transmission on final demand. Bank loans have no special role; they are rather determined by
demand and consequently tend to move with investment and output. In this case we can think
of money causing both output and lending. For the money channel to be effective, at least
two conditions ought to be fulfilled: (i) there are no perfect substitutes for base money such
that the central bank can influence the development of the nominal money stock by
increasing or decreasing the amount of base money ; (ii) the central bank is able to control
not only the nominal short-term interest rate but also the real short-term interest rate. This
latter condition can be considered as satisfied because prices do not react instantaneously on
monetary policy.

Though all theories of the monetary transmission mechanism share the view that central
banks can control money market real interest rates, there is less agreement on the process
through which a change in the monetary policy stance affects households’ and firms’
behaviour. The traditional Keynesian transmission mechanism (the money view) has
recently come under attack by the proponents of the credit channel of monetary policy
transmission that complements the conventional money channel and, hence, tends to amplify
and propagate the standard interest rate effects of monetary policy on real activity.

2
The interest rate channel conveys the direct impact of interest rate changes on the user cost of capital and
subsequently on firms’ investment. According to this channel a monetary contraction increases the nominal
interest rate (liquidity effect); this in turn decreases both consumption and investment and leads to a fall in
output.

4
• The credit channel: This channel was proposed as an extension to the classical rate
interest channel. It was thought indeed that the traditional interest rate channel is not
sufficient to explain several stylised facts, which include issues of timing and size of the
responses of private spending to monetary policy; therefore, it has proved useful to broaden
the analysis to include the banking sector and the particularities which it implies3 (Mishkin,
1995). The credit channel of monetary policy transmission includes two approaches that
purport to analyse the relationship between changes in monetary policy stance and the size of
the external finance premium: the balance sheet channel4 and the bank lending channel. The
second approach consists of the narrow credit channel or the bank lending channel or also the
lending channel, as described by Bernanke and Blinder (1988). In contrast to the "money
view", bank loans and bond issues are considered as imperfect substitutes. Monetary policy
may have amplified effects on aggregate demand by modifying the availability or the terms
of new loans. The basic idea of the narrow credit channel is that it predicts that changes in
monetary policy affect bank loan supply and, therefore, bank-dependent borrowers and
private investment. A monetary shock affects the availability of loanable resources on the
liabilities side of the banking sector’s balance sheet, for example, increases theses funds and
induces lending on the part of banks both directly and indirectly, by alerting the perceived
costs of information asymmetries (Mishkin, 1995); under this explanation, monetary changes
directly affect banks balance sheet with a reduction on bank loans, which in turn affect output
(Bernanke and Blinder, 1988, 1992 ; Bernanke, 1983,1986,1993). The lending channel
emphasises the role of the asset side of banks' balance sheets and is based on the existence of
bank dependent borrowers and the specificity of bank loans. The existence of this channel
relies on two basic conditions: (i) on the one hand, monetary authorities should be able to
affect the supply of bank loans through open market operations or other monetary
instruments; (ii) on the other hand, there should be no perfect substitutes to bank loans for, at
least, some types of borrowers. Obviously, these conditions clearly depend on the structure of
the financial system and its regulation.

• The exchange rate channel: With the growing internationalisation of economies

throughout the world and the advent of flexible exchange rates, more attention has been paid
to monetary policy transmission operating through exchange rate effects on net exports. The
exchange rate is the relative price of domestic and foreign money, so it depends on both
domestic and foreign monetary conditions. The precise impact on exchange rates of an
official rate change is uncertain, as it will depend on expectations about domestic and foreign
interest rates and inflation, which may themselves be affected by a policy change. However,
other things being equal, an unexpected rise in the official rate will probably lead to an
immediate appreciation of the domestic currency in foreign exchange markets, and vice versa
for a similar rate fall. The exchange channel involves interest rate effects because when
domestic real interest rates fall, domestic currency deposits become less attractive relative to
deposits dominated in foreign currencies, leading to a fall in the value of dollar deposits
relative to other currency deposits, that is, a depreciation of the dollar. The lower value of the
domestic currency makes domestic goods cheaper than foreign goods, thereby causing a rise

3
A significant volume of primarily empirical research on the monetary transmission mechanism has already been
produced for the US economy and surveyed in Bernanke (1993), Bernanke and Gertler (1995), and Kashyap and
Stein (1994). Overall, the evidence points to the importance of the banking sector in the transmission of monetary
policy, a result consistent with the credit view, although it appears that this channel has lost some of its
significance over time.
4
The balance sheet channel of monetary policy predicts that changes in monetary policy stance affect the real
economy through their impact on borrowers’ financial positions. This channel will not be considered in this
paper. Our focus, in this paper, will be stressed on the second approach.

5
in net exports and hence in aggregate output. The basic idea behind this channel is that a
contractionary monetary policy leads to an appreciation of the local currency, which in turn
will reduce exports and exert downward pressure on inflation. The currency appreciation will
also reduce domestic inflation through lower import prices. The exchange rate channel is one
of the key channels of monetary transmission notably in open economies; the more open the
economy, the more important the exchange rate channel.

• Monetarist channel: Finally, there is also what might be described as a monetarist

channel—“monetarist” in the sense that it focuses on the direct effect of changes in the
relative quantities of assets, rather than interest rates (Meltzer (1995)) summarizes this
viewpoint. This monetarist channel is similar in spirit, but considerably more sophisticated
than the earlier strand of monetarist thought based on the equation of exchange- MV=PY.
The logic here is that because various assets are imperfect substitutes in investors’ portfolios,
changes in the composition of outstanding assets brought about by monetary policy will lead
to relative price changes, which in turn can have real effects. According to this view, interest
rates play no special role other than as one of many relative asset prices. Although this
mechanism is not part of the current generation of New Keynesian macro models, it is central
to discussions of the likely effects of policy when, as in the case of Japan, there is a binding
zero lower bound on nominal interest rates

3. The Methodological Framework

3.1. Data Issue

The first important issue that arises in studying the monetary transmission mechanism is how
to measure the stance of monetary policy in Morocco and Tunisia. The econometric literature
relating to the theme of monetary transmission mechanism has showed that two main
variables are often used in the empirical studies: a short interest rate and the base money
variable. Generally, the ideal instrument to use as a measure of the stance of the monetary
policy would be the official interest rate at which marginal financing is provided to the
banking system; unfortunately, it is impractical to pursue this approach for several reasons:
for instance, central banks in Tunisia as well as in Morocco typically provide financing using
a number of different interest rates (usually preferential interest rates)5. Therefore, it would
be more judicious to focus on quantities rather than prices as indicators of the monetary
switches. Reasons that we focus on quantities rather than prices as indicators of the monetary
policy switches in the case of Morocco and Tunisia are twofold. First, base money variables
could be used as a measure of monetary policy changes because it is deemed to be under the
central bank control. Second, the experience has proved that the behaviour of market
determined interest rates is such that, on the one hand, they respond very slowly and
smoothly to changes in monetary policy when they are expressed by a change in an official
interest rate; on the other hand, they exhibit no response when they are expressed by a
change in the availability of credit. Furthermore, the two countries have been undertaken
reforms of their financial sector since the ending of 1986; among the chief objectives of these
reforms, the financial stability goal takes up an important place. Consequently, the interest
rates could not be considered as instruments; rather they are considered as secondary goals.

5
These rates are generally not controlled directly by the central bank. However, they do not reflect the changes
in monetary policy as they basically do not represent the price of liquidity to financial intermediaries; they are
administrated.

6
Therefore, in the empirical work, we focus on the following variables6: the base money
(reserve money), the narrowest monetary aggregate available (B), the price level as proxied
by the Consumer Price index (P), a measure of broad monetary aggregate (M2), and real
bank loans (L), and the real effective exchange rate (E); the activity is also used and is
measured by the gross domestic product (Y). All the series are quarterly except the Y
variable; in order to generate a quarterly figure for this variable, we recoursed to the Chow-
Lin procedure using the industrial production index as a benchmark. All the variables cover
the period 1988:Q1 to 2001:Q4 and are all in logarithms.

3.2. Econometric Methodology.

Seeing that our interest is focused on the impact of monetary policy, it would be judicious to
recall that the use of monetary policy is separated into two parts, anticipated policy and
unanticipated policy. The anticipated component reflects the response of policy to economic
conditions at least to the extend that is in keeping with past policies. The unanticipated
component reflects how policy has deviated from the usual path (Cochrane, 1995). This
distinction between these two component types is drawn of monetary policy is drawn using a
structural model that can be expressed in the framework of a VAR. These dynamic systems
of equations examine the interrelationships between economic variables by imposing
minimal assumptions about the underlying structure of the economy which- given the limited
knowledge and lack of consensus about transmission mechanism in the two countries is a
distinct advantage. VAR models aim at determining the impact of unanticipated changes in
monetary policy; nonetheless, these changes cannot be directly detected. Indeed, reduced-
form innovations of VAR models cannot be interpreted as structural or deep shocks;
typically, they are correlated; thus the challenge here is to identify policy shocks (structural
shocks) in endogenous variables.

The starting point for the analysis of a structural VAR is the estimation of a reduced form
VAR including sufficient lags in order to describe the underlying dynamics.

D(L)Xt = εt var(εt)=Ω (1)

where D(L) is an (N×N)-polynomial Lag such that D(L)=D0+ D1L+D2L2+…DpLp, and L is

the lag-operator with Lixt = xt-i. As Eq.(1) represents a reduced form then D0=Id. The pth
order VAR process in Eq.(1) can be taken to be the true data generating process for xt or a
finite order linear approximation to an underlying infinite order linear or non-linear model.
The covariance matrix of the residuals εt (Ω) is, in general, non-diagonal. Therefore, the
shocks in εt cannot be the structural innovations which are assumed to be uncorrelated with
each other. If the matrix polynomial D(L) has all its roots greater than one in modulus, it is
invertible and there exists an infinite order MA-representation. This Wold representation will
be written as:
Xt = C(L)εt avec C(L)=D-1(L) et C0= Id (2)

6
We include them because, as we have mentioned, bank reserve are sometimes used as a measure of monetary
policy changes as they are under the control of the central bank. On the other hand, we include a broader
aggregate, as we would like to shed some light on the distinction between the money and the lending channel.
Presumably, if there exists a lending channel, it must reflect in credit movements that are different from
movements in a monetary aggregate broader than bank reserve.

7
where C(L) = D(L)-1. Now suppose that the VAR representation of the structural form can be
written as:
B(L)Xt = ηt avec E(ηtηt’)= σ.Id (3)
Without loss of generality, the covariance matrix of the structural shocks ηt is normalized to
Id. If the matrix polynomial D(L) is invertible, so is the matrix polynomial B(L) and one can
write the structural MA(∞) representation as:

Xt = A(L)ηt (4)
Note that A(L) = B(L)-1. The structural MA representation in Eq.(4) is also called the final
form of an economic model because the endogenous variables xt are expressed as distributed
lags of the exogenous variables, given by the elements of ηt. However, the exogenous
structural shocks ηt are not directly observed. Rather, the elements of ηt are indirectly
observed through their effects on the elements of xt. We can obtain the structural shocks ηt
by first estimating the reduced form VAR (1) and transforming the reduced form residuals.
From Eq.(2) and Eq.(4) we have:
A(L) ηt = C(L)εt (5)
Let subscripts indicate the matrix of coefficients at the corresponding lag. As C0=Id and
Eq.(5) must hold for all t, we have:
A0ηt = εt ⇒ ηt = A0-1εt (6)
Squaring both sides and taking expectations yields:
A0ΣηA0’= Σε (7)
Combining Eq.(5) and Eq.(6) we find:
A(L)ηt = C(L)A0ηt (8)
which implies:
Ai = A0Ci (9)
Note that knowledge of is sufficient for the full identification of the structural system. When
A0 is known, all structural coefficients of the lag polynomial A(L) and the structural
innovations ηt are easily calculated from the estimated reduced form VAR using Eq.(6) and
Eq.(9).

The identification of the structural VAR is achieved through two sets of restrictions. First,
equation Eq.(7) places n(n+1)/2 restrictions on the elements of A0. Second, additional n(n-
1)/2 additional restrictions are needed to fully determine A0. In the structural VAR literature
these restrictions are usually taken from economic theory and are intended to represent some
meaningful short-run or long-run relationship between the variables and the structural
shocks. For a meaningful interpretation of the dynamics of the system, Eq.(1) has to be
identified. That is, the reduced form model with correlated innovations has to be transformed
into a structural form with uncorrelated, economically interpretable shocks. Much of the
discussion in the literature that examines the impact of monetary policy deals with the issue
of how to best identify monetary policy shocks.

In order to improve our knowledge of transmission mechanism of monetary policy in

Morocco and Tunisia, we proceed as follows. In a first phase, we consider a general VAR
including different possible transmission variables, such as the exchange rate, credit to
private sector, and measure of a broad money. The model also includes output, princes and

8
the central bank instrument (the money base). The analysis of this model allows as to assess
the importance of the three channels. The existence of each supposed channel is then verified
using the impulse response function. The second phase deals with the relative importance of
each channel. To that end, we consider a slightly different VAR model (in the quest of the
parsimony) comprising only two competing transmission variables by having recourse to the
Ramey(1993) method. Nevertheless, a precondition for all that is so called identification
problem. The objective of a VAR is to determine the impact of unanticipated changes in
monetary policy. The problem with VAR model is that the innovations it produces cannot be
interpreted as structural shocks (deep) because the reduced-form errors are typically
correlated. The challenge here is to distinguish policy changes from endogeneous changes in
monetary variables7.

The most common solution to this problem is to diagonalise the variance-covariance matrix
of the VAR system using a triangular orthogonalisation scheme; the so called Choleski
scheme. While this approach has the advantage that shocks to the VAR system can be
identified as shocks to the endogeneous variables, it relies on particular ordering of variables.
Policy variables are often placed first in the system, implying that these variables respond
only to the lagged values of the variables, like output and inflation, while the latter respond
contemporaneously to the policy variables. When the off-diagonal elements of the variance-
covariance matrix of innovations are large, this approach is obviously restrictive; in such
case, one could/might use different ordering of the variables in the VAR; an alternative
approach is to recourse to additional tests to determine the variables that will be placed first
in the VAR; such an approach relies heavily on the institutional set-up and the operating
procedure of monetary policy (Bernanke and Blinder, 1992). A final solution would be to
impose more structure on the VAR; this could be done by imposing short-term restrictions
(Sims, 1986 and Bernanke, 1986) or long-run restrictions or a combination of these two types
of restrictions. Nonetheless, this solution is not lacking without/in serious caveats; indeed, as
with Choleski scheme, the problem here is that the results tend to depend on the specific set
of identifying restrictions, but in contrast these restrictions tend to be more credible. If the
contemporaneously correlations are low among at least the relevant innovations for the
empirical fact analysed, then the ordering will have little or no effect.

4. Estimations and Simulations Results

Before turning to the results, we should note that to really, get grip on the importance of each
channel transmission, one would have to study each in detail, ideally making use of micro-
data. Given the data constraints about Morocco and Tunisia, we focus on documented
stylised facts about monetary transmission, this paper adapts the VAR methodology to obtain
rough indication on the relative importance of each channel. Once the picture is clear enough
and the key elements of the “black box” are identified, further research can be conducted to
more systematically uncover to factors responsible for making one channel more important
than the other in the case of two countries.

Besides, we have assumed that the monetary base could be considered as a relevant measure
of the monetary policy stance in the two countries; therefore, to set one’s mind at rest, it
would be judicious to recourse to a simple statistical model that has no theoretical
foundations or institutional background in order to confirm this assumption. The basic idea
7
This issue has been discussed more widely and formally by other authors (Sims, 1988; Bernanke and Blinder,
1992; Christiano & Eichenbaum, 1992), we only provide informal information.

9
behind this way of proceeding is that the measure of monetary policy shock is left to
arbitrariness of the researcher, that could select it among different candidates, including a
battery of monetary aggregates and short term rates8. Obviously, a measure is preferred to
another if and only if the results that it produces are more or less in accordance with the
chosen policy.

In order to gauge the strength of each channel through which the monetary policy effects are
propagated to real sector, a lot of ways would be possible. In this paper, we use a VAR
model including the different transmission variables corresponding to the different channels
we intend to evaluate. This basic VAR contains also two other types of variables: monetary
policy variables and policy objective variables. The assessment of the channels could be done
by recoursing to the powerful VAR tools, namely the impulse function responses (IRF) and
the forecast errors decomposition variance (FEDV); they help us to gather a lot of
information on the potential transmission channels. Better still, another test to which we refer
by ‘exogenity exercise’ is also used. The basic idea of this test is the following: when
focussing on a particular channel, say exchange rate channel, then we first run the basic VAR
model containing all the variables and we calculate the impulse responses of the target
variable (the real output); then, we exogenise the exchange rate variable and we rerun once
again the VAR model to get a second set on impulse responses. When compared to each
other, the two sets of impulses responses can deliver an information on the relative
importance of the tested channel. The latter procedure generates a VAR identical to the
former (with identical orthogonalised innovations), except that it effectively blocks off any
response within the VAR that passes through the variable of interest. The comparison of the
output responses of the two models provides then a measure of the importance of that
particular channel as a conduit for monetary policy to the real economy (Ramey,1993 and
Bayoumi and Morsnik, 2001).

4.1. Monetary Channel.

Before turning to the analysis of the VAR results, it is important to explain the foundation of
causality schemes (reported in Fig.1 and Fig.2, Appendix A). As it appears from these
figures, every arrow going from a y variable to an x variable is endowed with a number; this
number represents the share of the y variable innovations in the x variable variance; for
instance in Fig.1 the share of price innovations is about 50.6 percent in real GDP variance. In
order to report a readable scheme, I decided to report only significant FEVD values (that are
greater than 5 percent). Furthermore, this type of representation seems to be easy to analyse
especially when it comes to the transmission mechanism assessment.

<INSERT Fig.1 ABOUT HERE>

Having present in mind that numbers are not always directly comparable, since we cannot
logically weigh up only the arrows having the same target, it is nevertheless possible to draw
some conclusions from Fig.1 and Fig.2. First, the monetary channel seems to exist in Tunisia
as well as in Morocco; yet, it seems more powerful in Tunisia. Indeed, monetary base
innovations account for slightly more than 20 percent of the variance of the broad money.
Besides, money innovations account in turn for around 32 percent in real output variance.
These significant influences suggest that broad money may be an important channel for

8
In the case at hand, it is matter of choice between money market rates and monetary base variables.

10
transmitting changes in monetary policy instruments (the monetary base). To examine this
issue more deeply, we rerun the VAR with the broad money variable (M2R) exogenised.
More precisely, the lagged values of broad money are treated as exogenous variables. Such a
procedure generates a VAR identical to the original, except that it blocks off any response
within the VAR which pass through the broad money variables, hence comparisons of the
responses of two models allows us to measure the relative importance of the money in the
transmission mechanism. Comparing the two impulse responses of real output (RGDP) to
monetary base innovations (Fig.3, Appendix B), it is unambiguous and clear that the money
supply is an important conduit for the impact of the monetary base on the real activity.

As for Morocco, it appears at first glance that the monetary channel is relatively weak. The
direct impact of monetary instrument innovation on broad money has a weak magnitude
(about 6 percent). Yet, on its second part, this channel is more powerful (24.4 percent).
Consequently, if we conceive, as in macroeconomic textbooks, that for a monetary channel to
be functioning, there should be a sensible direct effect of monetary policy instrument on the
transmission variable, then it would be hard to claim the existence of such channel in
Morocco especially when taking into account the low contribution of monetary base
innovations to broad money variance (about 6 percent).

<INSERT Fig.2 ABOUT HERE>

To be more enlightened about this issue, we have rerun the VAR model with broad money
variable exogenised and we compared the output responses. The results of this exercise,
depicted in Fig.4, indicate that when broad money is exogenised the output responses alter.
But are we quite right in interpreting this alteration as a sign of the importance of the
monetary channel ?

In principle, when it comes to the monetary channel, the fact of blocking off the assumed
channel would entail the weaknesses of the effects of, for instance, an expansionary
monetary policy. Is this the case ? I am inclined to answer by no.

4.2. Lending Channel

When considering the Moroccan case, it appears from Fig.2 that this channel would not exist
since the contribution of monetary base innovations to variance loans is insignificant (about
0.8 percent). Although the second part of this channel is functioning (Loans innovations
account for about 12.6 percent in output) it is really hard to conceive the existence of this
channel in Morocco. In order to shed more light on the issue linked to the importance of
banks in propagating the monetary shocks, we exogenised bank loans in the calculation of
the impulse responses. As shown in Fig.6 the output responses to monetary shocks -when
considering the same basic model- with and without loans exogenised are quite similar.
Furthermore, a variance decomposition9 reveals that the share of output variance accounted
for by the monetary policy instrument does not alter, reflecting the weak role -if not the
absence- of the lending channel in transmitting the effects of monetary policy shocks.

9
not reported here but available on request

11
As for Tunisia, when we have a look at the two causality schemes we notice the asymmetric
situation in relation to lending channel (Fig.1 and Fig.2 in appendix B). On the one hand,
unlike Morocco, it stands out from Fig.1 that the monetary base handling allows the CBT to
take significant actions on loans. On the other hand, loans exhibit no effects on output -the
impact of loans innovations on output amounts to 4 percent-. This noting is indeed in
conformity with the idea we have about the economic Tunisian reality: the CBT has always
tried to stimulate -often unsuccessfully- economic activity by encouraging the grant of loans;
however, these loans have had no significant impact on activity. The serious explanation that
could be put forward is that the near total loans were intended either to saturated sectors or to
weak value-added sectors.

These results may seem unexpected given the importance of banks in the Tunisian as well as
in Moroccan financial system. As far as Tunisia is concerned, the majority of Tunisian firms
(about 80%) employ less than 10 employees; they cannot get financed by the financial
market; in short, they are bank-dependent borrowers. Likewise, although to a less extent in
Morocco, firms are also bank-dependent borrowers. Furthermore, the industrial firms in the
two countries, and especially in Tunisia, are very limited and find it hard to get financed by
the financial market, which in turn, is not yet enough developed.

4.3. The Exchange Rate Channel

For small open economies, a potentially important channel through which the monetary
policy may affect real activity is through its effects on the exchange rate. For an exchange
rate channel to exist, two conditions must be fulfilled. First, the shock in monetary base
should result in an appreciation of the domestic currency. Second, the appreciation should
generate a decline in output and prices. Specifically, a nominal depreciation brought on by
monetary easing, combined with rigid prices, results in a depreciation of the real exchange
rate in the short-run and thus higher output. The strength of the exchange rate channel
depends on the responsiveness of the exchange rate to monetary shocks, the degree of
openness of the economy, and the sensitivity of net exports to exchange rate variations.
However, substantial unanticipated exchange rate depreciations can actually reduce output
when a significant share of debt in the economy is foreign currency dominated (see Disyatat,
2001).

When examining the FEVD as summarised in Fig.1, we have the impression that the
exchange channel might exist in Tunisia. However, it appears that its importance is moderate
considering the low contribution of monetary base innovations to the real exchange rate
(around 5 percent). But the data reveal that this variable might have a significant impact not
only on domestic prices but also on loans. In order to confirm this primarily idea we
exogenised, as above mentioned, the assumed transmission variable (the exchange rate) and
we compare the two impulse responses of the real output. It stands out from this exercise (see
Fig. 8, Appendix B) that when the assumed channel is blocked off, the real activity declines
indicating that the exchange real channel may be another active channel which co-exists
along with the monetary channel in Tunisia. It should also be mentioned that the fact that this
channel is not as powerful as the monetary channel owing to the recent creation of an
exchange market (beginning of 1994).

As for Morocco, one dares to think that the exchange channel is active, since Morocco has
followed, for a long time, an exchange rate anchor. Furthermore, the Moroccan monetary

12
authorities have pegged the Dirham to a basket currencies where the (nominal) exchange rate
fluctuates within a narrow margin around a central rate. According the FEVD (Fig.2,
Appendix A), the exchange rate channel is active in Morocco; besides, the monetary
impulses propagates through the exchange rate variable either directly, or indirectly via
money and/or prices, to real output. Better still, when exogenising the exchange rate, the
profile of output responses to monetary policy innovations (Fig.7, Appendix B) indicates that
the exchange rate channel is indeed active. Nonetheless, a word of caution : these responses
seem to be a little surprising ; in principal, when blocking off the assumed exchange rate, one
expects the real activity to decline; yet, the output responses exhibit a hazardous trajectory.
One explanation that could be put forward is the following : We remind also that under fixed
exchange rate (pegging regime), the exchange rate channel could be active. Real exchange
rate, however, can vary under a pegging regime so that there is a scope for monetary policy
to affect real activity through this channel but effects are likely to be muted given that prices
adjust slowly. Indeed, this is what happens exactly in Morocco as shown in Fig.7.

4.4. Digression on Exchange policy and the Monetary Authorities’ Reactions.

Before analysing in detail the results of the VAR simulations related to exchange rate policy,
it is essential to remind that since real effective exchange rate (REER) represents the ratio of
price of tradable goods to non tradable goods, an increase (decrease) in REER indicates
depreciation (appreciation). Moreover, to better understand and to be more enlightened about
the Tunisian monetary policy, it would be judicious to analyse the reaction of the CBT. But
before that, we should remind that Tunisia decided to follow a constant real exchange rate
rule (CRERR) in an effort to index the nominal exchange rate to the domestic price level in
order to avoid losses in competitiveness. Obviously, a CRERR prevents the nominal
exchange rate from serving as a nominal anchor (for instance, shocks to domestic price level
may be fully accommodated by a faster rate of exchange rate depreciation and a faster rate of
monetary growth).

From the IRF results related to Tunisian data, one can draw the following observations. First,
it stands out that a shock in monetary base (expansionary monetary policy) results in an
appreciation of the currency; which does not last more than one year. Afterwards the real
exchange rate quickly comes back to its initial equilibrium position. Consequently, the
impact of the monetary policy shock on the exchange rate is not persistent; it rather appears
temporary. As shown in Table (5.a), the depreciation of the Tunisian currency causes an
initial decline of the activity. Nevertheless, as soon as the exchange rate baits its rise, the real
output quickly reverse its tendency (after one quarter) and starts to raise. Second, our VAR
simulations point out to the fact that a positive exchange rate shock (a depreciation) generates
a positive real output response signifying that a devaluation yields the standard expansive
real effects. The response of activity is quietly rapid and reaches its peak (maximum) after
about three quarters; and, the shock does not persist. The impact of this shock on domestic
prices is immediate: they fall down and converge to a new equilibrium position (see Table
4.a). Third, although a positive exchange rate shock induces a positive impact on activity, the
reaction of the CBT appears to be quick indicating a willingness to stabilise the real effective
exchange rate; besides, it succeeds to ascertain its coming back to its baseline during only
three quarters. This finding is totally in accordance with the a priori idea we have about the
CBT policy. On the other hand, prices reacted in such a way that they exhibit some rigidity
during the two first periods. Afterwards, prices trigger a persistent decline which brings
them to a new steady state equilibrium (Table 4.a). Furthermore, the IRF results are very
interesting, they clearly show that following a depreciation of Tunisian Dinar, the CBT

13
intervenes to ascertain the REER currency stability along with taking care about its
intermediary objective (M2). In short, the simulations show that it is possible, for the
Tunisian monetary authorities to manage the exchange rate shocks without harming its
internal objectives.

As for Morocco, the simulation exercise shows that, as strange as it might appear, a positive
exchange rate shock does not contribute to increase the activity; in contrast, the depreciation
of the Moroccan currency seems to weaken the economic activity; the real output (RGDP)
declines and its exhibited downward tendency lasts for about two years; then it displays a
tendency to come back to its equilibrium position. Actually, this apparently outstanding
result is not difficult to explain. What appears from the aforementioned outcome of the BAM
reaction exhibits a great determination against the depreciation of its currency. Besides, the
logic that might explain this behaviour is the following: the Moroccan currency faced a lot of
pressures stemming mainly and primarily from textile, clothes and agricultural products’
exporters and from tourists companies. The external competitiveness of these sectors has
probably been affected during notably the 1990s by an appreciation of real effective
exchange rate (REER). Consequently, this situation may have contributed to some losses in
export market shares when compared to more export-oriented developing countries.
Nonetheless, despite all these remarks, the Moroccan monetary authorities do not seem
inclined to accept a devaluation. This attitude is well illustrated by our simulations. Indeed,
in spite of the demands of export sectors to devaluate the Dirham, Moroccan authorities have
firmly refused. Why do they refuse to devaluate the Dirham ? Are they right in doing so ?

As for the first question, we do believe that the fact that the BAM is not willing to devaluate
its currency could be justified by its fear of the negative repercussions of a weaker currency
on the economy stemming notably from a further increase of the oil import bill, an increase
in the serving costs of the external debt and importing of external inflation. As for the second
question, we recognise that it is not straightforward to provide a compelling answer.
However, the inspection of the IRF profiles might help us to find out some piece of
information. In fact, The Moroccan output response to a positive exchange rate shock is
totally different from that obtained in the case of Tunisia. More precisely, from Table (6.b)
one can draw, at least, the following observations: (i) Following a depreciation of the
Dirham, the RGDP declines and its downward tendency lasts for about two years indicating
that a devaluation would worsen the economic situation (it would cause a decrease of the
activity and a rise of prices). This might explain why the BAM seems to be firmly
determined to defend the value of its currency.

As far as demand shocks are concerned, the reaction to a demand shock is different according
to each country. For instance, if we consider the case of Tunisia, we notice that subsequent to
a positive demand shock, the demand for broad money (real balances) increases and the real
exchange rate depreciates causing the increase of the activity. But when the CBT noticed that
the monetary dynamics deviates from its target trajectory, it intervenes to bring it back to its
desired path -we remind that CBT follows a monetary targeting strategy10. This intervention
causes again an appreciation of the Tunisian Dinar. The most striking fact is that prices do
not decrease as expected; they rather stabilise after three years around a new steady state
equilibrium.

10
For further details, see Boughrara (2002) for full description of this strategy.

14
Comparing these results with those occurring in the Morocco case subsequent to the same
type of shock, one can draw the following remarks: (i) the shock generates an S-shaped form
of real output variable; (ii) in the case of Morocco, following the demand shock, Moroccan
currency depreciates and the intervention of BAM in the hope of defending the value of the
Dirham does not seem successful; yet, the restrictive monetary policy appears also non
effective ; and finally, (iii) faced with the same type of shock, the reaction of the Moroccan
monetary authorities is at variance with that of Tunisia.

Since a positive demand shock appears to depreciate the currency, the immediate reaction of
the BAM is to intervene to defend the value of its currency. As it stands out from Table (2.b)
BAM intervenes to appreciate the value of its currency without success. On the hand, its
decision to implement a contractionary monetary policy, as shown by the IRF of the
monetary base, appears at first glance in contradiction with its wish to save the currency
value. Furthermore, this decision seems to be the main cause of the decline of the activity
(see the profiles of the monetary base and the real output).

As for Tunisia, the demand shock generates an S-shaped output. It seems that the CBT
consolidates this tendency by an expansive monetary policy at least during the first year;
afterwards, it switches its policy in order to master the skid of broad money. All in all, it is
clear that the CBT takes care about its intermediary objective target (the M2 variable).
Indeed, the prices and real balances profiles indicate that after two years the CBT succeeds in
restoring M2 trajectory to its desired path.

In sum, it appears from the IRF profiles reported in Table (2.a) that the CBT takes care about
not only the activity but also about its announced intermediary target. Besides, this latter
objective gets the upper hand. Typically, this could be checked from all the variables
profiles. Another particularity of Tunisian monetary and exchange policy is the consequences
of a demand shock. From table (2.a), we notice the emergence of a persistent rise of prices-
the prices dynamics converge towards a new steady state equilibrium where inflation is
higher than before the shock-. This phenomenon is well expected to occur in countries
having adopted a CREER.

When a country is subject to a positive demand shock, excess demand for non tradable goods
will occur. If the exchange rate system is fixed, then the balance of the non tradable goods
market is restored through a relative increase in the price on non tradable goods compared to
tradable goods (an appreciation). Yet, when the country follows a real exchange rate rule,
such an appreciation will not occur: when the prices of non tradable goods increase, the
nominal exchange rate would depreciate at a rate that would maintain the real exchange rate
constant. Thus, while the exchange rate appreciates as a result of the shock, the actual value
of the real exchange is kept constant. This adjustment would place in motion an inflationary
process; that is what we observe in the case of Tunisia. These claims are supported by
Montiel and Ostry (1991); these authors pointed out, in the aftermath of a demand shock, that
a new steady state equilibrium could be reached where inflation would be higher than before
the shock11. They showed that a CRERR has a bias towards a higher inflation rate (even if it
does not lead to hyper-inflation).

11
This is what happens exactly in Tunisia subsequent to a demand shock.

15
5. Main Findings, Policy Implications and Concluding Remarks

Economists and central bankers have often claimed that among the serious obstacles they face
when implementing their monetary policy is the uncertainty surrounding the transmission
mechanisms of monetary policy. Such uncertainty weakens the effectiveness of the monetary
policy and postpones the credibility building. This paper has put forward some clearings up
about the MTM issue in Morocco as well as in Tunisia.

As for Tunisia, the results indicate clearly that the choice, done by the CBT since 1987, of the
monetary targeting strategy is a rational and relevant one. Indeed, the monetary channel
seems to be the most important one in terms of debit. The propagations of the monetary policy
impulses pass through the broad money to impact either directly, or indirectly via the prices,
the real activity. Nonetheless, one should draw the Tunisian monetary authorities attention
about the lack of the exogeneity of the monetary base; the feedback going from broad money
to the CBT instrument may weaken the effectiveness of the monetary targeting strategy. This
problem is mainly due to the banking system difficulties; yet, the experience has proved that
these difficulties have made it difficult, during some periods, for the CBT to reach its
announced goals (in terms of M2). Therefore, in order to strengthen the effectiveness of the
monetary targeting strategy the CBT should pursue the following guidelines (i) the CBT has
to devote a great deal of effort to empirical studies related to the specification as well as to the
stability of money demand functions; this task will not be hard to do, seeing the availability
and the quality of Tunisian data ; (ii) the CBT should develop the technical capability of their
employees (the use, for instance, of macro-econometric models for purposes simulations) in
order to be prepared in advance to move, when necessary, to inflation targeting strategy. As
far as inflation targeting is concerned, the results reported in this paper show that the effective
exchange rate and the broad money are two important leading indicators for inflation in
Tunisia.

As for the Moroccan case, it was shown that the monetary channel exists but it appears to be
less important than in the Tunisian case notably because of the weak relationship between the
BAM instrument and the assumed transmission variable (the broad money); in case the BAM
decides to implement a monetary targeting strategy, the loose connexion will not help the
BAM to reach its expected outcomes and to build consequently its credibility. We do believe
that the weakening of this relationship is due to the following factors : (i) the low
controllability of the broad money, which itself is due to the liquidity excess problem that the
Moroccan banking system has witnessed and continues to witness up today; (ii) the lack of
exogeneity of the monetary base owing to the lack of independence of the BAM vis-à-vis the
banking system; we remind that BAM is a member of the board of a good number of banks
and is also a shareholder; (iii) the fear of instability of the banking system pushes the BAM to
fulfill the demands of banks facing difficulties.

The paper’s results cast serious doubts on the ability of the BAM to follow, at least in the
short run, a monetary targeting strategy. The success of such strategy will heavily depend on
the real wish of the Moroccan monetary authorities to launch serious reforms of its financial
and monetary system.

As for the lending channel, the most surprising result this paper exhibit is that the lending
channel is not active in Morocco as well as in Tunisia. This may seem, at first glance,

16
unexpected given the importance of banks in the two countries financial systems.
Nevertheless, when checking the empirical results, one would enable some explanations. Let
us first remind that the empirical results reported in this paper highlight two major factors: (i)
the lending channel is neither active in Tunisia nor in Morocco; (ii) this inaction is due to
different causes in each country; in the case of Tunisia, the inaction owes to the absence of
direct effects of loans on real activity ; conversely, in the Moroccan case, this inaction is due
to the lack of significant impact of the central bank instrument on loans. Besides, it stands out
from the analysis of the FDEV (see appendix A) that this points to an asymmetric situation
between Morocco and Tunisia.

As far as Tunisia is concerned, we do believe that the results, related to the lending channel,
are in accordance with the a priori idea we have about the problems the Tunisian monetary
authorities have faced: the lack of profitability of loans. Tunisia has indeed witnessed during
the last decade a new phenomenon: the loans granted by the banking system has little, if any
no, impact on real output. This owes to the fact that the greatest share of these loans are
intended to saturated sectors where competition is absolutely cruel (services, real estate
sector..). Unlike Tunisia, Morocco has witnessed another change which rendered the
contribution of loans in real output more significant; since the beginning of the monetary and
financial reforms, the structure of loans has deeply changed favouring private consumption
and investments in real-estate. Unfortunately, the great independence of the banking system
from the BAM precludes this latter to influence efficiently loans via its monetary instruments;
in other words, changes in monetary instruments have no impact on the banks ability to lend.
To sum up, as far as loans are concerned, the MTM identification exercise enlightens the
policy makers about some obstacles that prevent the lending channel to being active: for
Tunisia, the monetary authorities should devote a lot of efforts when granting loans;
Moroccan authorities have to gain, on the one hand, some degree of independence from the
banking sector; on the other hand, they should do their best to make banking system more
depend more on their policy ; otherwise, the BAM will have no influence on the conduct of
the monetary policy in Morocco; yet, the Moroccan monetary authorities should be aware that
these measures constitute a first step towards, not only, improving the outcomes of the
monetary policy and strengthening its effectiveness, but also, a necessary condition to build
their credibility.

As for the exchange rate channel, it was shown that the exchange rate channel is active in
each country. This finding is not surprising, it was rather expected since the two countries
share a great volume of exports and imports with the rest of the world. The importance of the
exchange rate channel justifies the monetary policy strategy followed by the BAM, mainly an
exchange rate target regime. But, it remains to be seen whether this regime would be the most
relevant, for Morocco, in the future.

As previously highlighted, the Moroccan financial and monetary system requires serious
changes so as to enable the BAM to deal effectively with internal difficulties. Furthermore, if
the Moroccan monetary authorities continue to follow the same exchange rate regime, it
would be really hard to deal with the increase in potentially volatile capital inflows that might
follow the trade and capital account liberalisation. Moreover, the experience has shown that
Moroccan economy as well as the Tunisian one are more exposed to real exogenous shocks
(changes in the terms of trade, changes in the world oil prices especially Morocco,
dryness…); in such situation, a more flexible exchange rate might be more suitable for
Morocco to face these difficulties.

17
A lot of conclusions could be drawn from this paper empirical results. The effects on the two
countries’ economies when hit by demand shock are totally different. In the case of Morocco,
this lead to a deflationary process whereas in Tunisia the same shock type places in motion an
inflationary process which converges to a new steady state equilibrium where the inflation
level is higher than before the shock. This basic difference in terms of demand shocks
consequences might be due to the difference in exchange rate policies. As far as Tunisia is
concerned, it is shown that is due mainly the CRERR adopted by the monetary authorities. On
the one hand, considering that the aftermaths of such rule are well expected by economic
theory; and on the other hand seeing the primarily CBT objective of mastering inflation, it
seems for us at least difficult if not impossible to guess the motives behind the CBT strategy.
Indeed the two objectives (targeting inflation and following a CREER) seem contradictory at
least when the economy is subject to demand shocks. At this stage of the analysis, one would
like to understand why the monetary authorities continue to adopt these contradictory
objectives ?

It is true that during the estimation period Tunisia has not known a period of persistent
inflation. Rather, the Tunisian monetary authorities succeeded in reducing inflation to a level
not far from the main partner countries along with preserving competitiveness. Thus, the
Tunisian experience does not seem to reflect the above mentioned outcomes. This may likely
to be due to the following factors : (i) the absence of significant demand shocks during the
estimation period; (ii) the gradual and prudent macroeconomic policy-mix followed ; and (iii)
price and wage rigidities.

18
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20
Appendix A : Causality Schemes.

20.7% 11.8%
32.3%
34% 15.3% 15%

B 9.4% P 50.6%
8 7% E GDP
14 2%

16% 7.8%

33.5%

Fig.1: Causality Scheme (Tunisia)

24.4%
6% 27% 6.8% 12%
31% 14%

B 11% E 8.7% P 21.3% GDP

17.7%
12.7%

9.6% 16.3%

12.6%

Fig.2: Causality Scheme (Morocco)

21
Appendix B : Channels blocking off

Endogenous Broad Money

0,0012
Exogenous Broad Money
0,001
One Standard Deviation Innovations

0,0008

0,0006

0,0004

0,0002

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,0002

-0,0004

-0,0006

-0,0008

Fig.3: Tunisia: Response of Real GDP

0,007 Endogenous Broad Money

0,006
Exogenous Broad Money

0,005

0,004

0,003

0,002

0,001

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,001

-0,002

-0,003

Fig.4: Morocco: Response of Real GDP

22
 Total Impact
0,0012
Exogeous Loans
0,001
Exogenous Broad Money
0,0008
0,0006
0,0004
0,0002
0
-0,0002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

-0,0004
-0,0006
-0,0008

Fig.5: Tunisia: Lending Channel

Total Impact
0,007
Exogenous Loans
0,006
Exogenous Broad Money
0,005
0,004
0,003
0,002
0,001
0
-0,001
-0,002
-0,003
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Fig.6: Morocco: Lending Channel

23
0,004 Endogenous Exchange Rate
Exogenous Exchange Rate
0,003
0,002
0,001
0
-0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

-0,002
-0,003
-0,004
-0,005
-0,006

Fig.7: Morocco: Response of Real GDP

0,002 Endogenous Exchange rate

Exogenous Exchange Rate
0,0015

0,001

0,0005

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,0005

-0,001

Fig.8: Tunisia: Response of Real GDP

24
Appendix C:
Table 1b: Morocco : Response of the variables to one S.D innovations in the Real GDP.

RGDP P
0,015

0,002
0,01
0,001

0,005 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,001
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,002

-0,005 -0,003

LOANS BASE

0,012
0,02
0,01
0,015
0,008

0,006 0,01

0,004 0,005
0,002
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,005

M2R REEX

0,007 0
0,006 -0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0,005 -0,002
0,004
-0,003
0,003
-0,004
0,002
-0,005
0,001
0 -0,006
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,007

Table 2b: Morocco : Response of the variables to one S.D innovations in Price.

RGDP P

0,008
0,008
0,006
0,006
0,004
0,004
0,002
0,002
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0
-0,002
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,004
-0,004

LOANS BASE
0,006
0,008 0,004
0,007 0,002
0,006
0
0,005
0,004 -0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0,003 -0,004
0,002
-0,006
0,001
0 -0,008
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,01

M2R REEX

0,002 0,005

0 0,004
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0,003
-0,002
0,002
-0,004
0,001
-0,006
0
-0,008 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

25
Table 3b: Morocco : Response of the variables to one S.D innovations in Loans.

RGDP
P
0,003

0,002
0,0005
0,001
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,0005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,001
-0,001
-0,002
-0,0015
-0,003
-0,002
-0,0025
-0,003

LOANS BASE
0,05
0,002
0,04 0,001
0
0,03
-0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0,02 -0,002
-0,003
0,01
-0,004
0 -0,005
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,006

M2R REEX
0,012 0,002

0,01 0,0015
0,008 0,001
0,006
0,0005
0,004
0
0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,0005
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,001

Table 4b: Morocco : Response of the variables to one S.D innovations in money base.

RGDP P
0,004

0,003 0,0025
0,002
0,002
0,0015
0,001 0,001
0,0005
0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,0005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,001
-0,001
-0,002 -0,0015

LOANS BASE

0,01 0,04
0,008 0,03
0,006
0,02
0,004
0,01
0,002
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

M2R REEX
0,008
0,007
0,006 0,001
0,005 0
0,004 -0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0,003 -0,002
0,002
-0,003
0,001
-0,004
0
-0,005
-0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,002 -0,006

26
Table 5b: Morocco : Response of the variables to one S.D innovations in broad money.

RGDP P

0,006
0,002
0,005
0,001
0,004
0
-0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0,003

-0,002 0,002
-0,003 0,001
-0,004 0
-0,005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

LOANS BASE

0,008
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0,006
-0,005 0,004

0,002
-0,01
0
-0,015 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,002

-0,004

M2R REEX

0,01
0,008 0,004
0,006
0,002
0,004
0,002 0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,002
-0,004
-0,004
-0,006
-0,006

Table 6b: Morocco : Response of the variables to one S.D innovations in the Exchange Rate.

RGDP P

0,004 0,002

0,002 0,001
0
0
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,001
-0,004
-0,006 -0,002

-0,008 -0,003

LOANS BASE

0,005
0,01

0
0,005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,005
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,01

-0,005
-0,015

-0,01

M2R
REEX
0,014
0,012
0,002
0,01 0,001
0,008 0
0,006 -0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

0,004 -0,002
0,002 -0,003

0 -0,004

-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,005

-0,004

27
Table 1a: Tunisia: Response of the variables to one S.D innovations in RGDP.

R G D P P

0 ,0 0 7 0

11

13

15
0 ,0 0 6 -0 ,0 0 0 5
0 ,0 0 5
-0 ,0 0 1
0 ,0 0 4
-0 ,0 0 1 5
0 ,0 0 3
-0 ,0 0 2
0 ,0 0 2
0 ,0 0 1 -0 ,0 0 2 5

0 -0 ,0 0 3
- 0 ,0 0 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0 ,0 0 3 5
- 0 ,0 0 2

L O A N S R E E X

0 ,0 0 7 0 ,0 0 3

0 ,0 0 6 0 ,0 0 2
0 ,0 0 5 0 ,0 0 1
0 ,0 0 4
0
0 ,0 0 3

10

13

16
-0 ,0 0 1
0 ,0 0 2
0 ,0 0 1 -0 ,0 0 2

0 -0 ,0 0 3
1

11

13

15

-0 ,0 0 1

B A S E
M 2 R
0 ,0 1 5 0 ,0 1 6
0 ,0 1 4
0 ,0 1 0 ,0 1 2
0 ,0 1
0 ,0 0 5
0 ,0 0 8
0 ,0 0 6
0
0 ,0 0 4
10

13

16
1

0 ,0 0 2
-0 ,0 0 5
0

11

13

15
1

9
Table 2a: Tunisia : Response of the variables to one S.D innovations in Prices.

R G D P P

0 ,0 0 5 0 ,0 0 3
0 ,0 0 4 0 ,0 0 2 5
0 ,0 0 3
0 ,0 0 2
0 ,0 0 2
0 ,0 0 1 5
0 ,0 0 1
0 0 ,0 0 1
11

13

15
1

-0 ,0 0 1 0 ,0 0 0 5
-0 ,0 0 2
0
-0 ,0 0 3
11

13

15
1

L O A N S R E E X

0 ,0 1 0 ,0 0 2 5
0 ,0 0 2
0 ,0 0 8 0 ,0 0 1 5
0 ,0 0 1
0 ,0 0 6 0 ,0 0 0 5
0
0 ,0 0 4
11

13

15
1

-0 ,0 0 0 5
0 ,0 0 2 -0 ,0 0 1
-0 ,0 0 1 5
0 -0 ,0 0 2
-0 ,0 0 2 5
11

13

15
1

-0 ,0 0 2 -0 ,0 0 3

B A S E M 2R

0 ,0 1 2 0 ,0 1 2
0 ,0 1 0 ,0 1

0 ,0 0 8 0 ,0 0 8
0 ,0 0 6
0 ,0 0 6
0 ,0 0 4
0 ,0 0 4
0 ,0 0 2
0 ,0 0 2
0
0
11

13

15
1

-0 ,0 0 2
11

13

15
1

-0 ,0 0 2 -0 ,0 0 4
-0 ,0 0 4 -0 ,0 0 6

28
Table 3a: Tunisia : Response of the variables to one S.D innovations in the Loans.

0,0015 RGDP P
0,001 0
0,0005 -0,0005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0 -0,001
-0,0005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,0015
-0,001
-0,002
-0,0015

L O A N S R E E X

0 ,0 2 5 0 ,0 0 0 5
0
0 ,0 2

11

13

15
-0 ,0 0 0 5
-0 ,0 0 1
0 ,0 1 5
-0 ,0 0 1 5
-0 ,0 0 2
0 ,0 1
-0 ,0 0 2 5
0 ,0 0 5 -0 ,0 0 3
-0 ,0 0 3 5
0 -0 ,0 0 4
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 -0 ,0 0 4 5

B A S E M 2 R

0 ,0 0 5 0 ,0 0 9
0 ,0 0 8
0
0 ,0 0 7
11

13

15
1

-0 ,0 0 5 0 ,0 0 6
0 ,0 0 5
-0 ,0 1 0 ,0 0 4
0 ,0 0 3
-0 ,0 1 5
0 ,0 0 2
-0 ,0 2 0 ,0 0 1
0
-0 ,0 2 5

11

13

15
1

9
Table 4a: Tunisia : Response of the variables to one S.D innovations in Exchange rate

P
RGDP
0,0025
0,0005
0,002
0
0,0015
-0,0005
0,001
-0,001
0,0005
-0,0015

0
-0,002
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

LOANS
REEX
0,0035
0,003 0,01
0,0025 0,008
0,002 0,006
0,0015
0,004
0,001
0,002
0,0005
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

BASE
0,006 M2R
0,004 0,004
0,002
0,002
0
0
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,002
-0,004
-0,004
-0,006
-0,006
-0,008
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

29
Table 5a: Tunisia : Response of the variables to one S.D innovations in the Monetary Base.

RGDP
P
0,0015
0,001
0,001
0,0005 0,0005
0
-0,0005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0
-0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

LOANS REEX
0,001
0,004
0
0,002 -0,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0 -0,002
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,003
-0,004

BASE M2R
0,06 0,015

0,04 0,01
0,02 0,005
0 0
-0,02 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Table 6a: Tunisia : Response of the variables to one S.D innovations in the Broad Money

RGDP P
0,0005
0,0015
0,001 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0,0005 -0,0005
0 -0,001
-0,0005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

LOANS REEX
0,0005
0,006
0
0,004 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0,0005
0,002
0 -0,001

-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0,0015

BASE M2R
0,02

0,006 0,015
0,004 0,01
0,002
0,005
0
-0,002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

30