Explaining the Tunisian Real Exchange: Long Memory versus Structural Breaks

This paper investigates the dilemma of long memory versus a switching regime for the Tunisian real exchange rate (TRER). Empirically, three long memory tests are implemented to examine the long-range dependence in the processes of Tunisian REER. All long memory tests that we used are based on the frequency approach (log- periodogram estimation). While, we apply the Bai Perron (1998, 2003) test in order to detect structural changes in the studied series. In order to discriminate between true long memory or spurious long memory on presence of structural change, we adopt a recent test developed by Perron and Qu (2010). The empirical results show strong evidence in favour of a short memory process with level shifts and not a true long memory process. The presence of structural break traduces that policymakers in Tunisia are unable to react on the exchange rate system through central bank interventions. Therefore, we recommend to Tunisian policymakers to follow a strategy of the market-orientation to make the relevance reforms, such as revisit the weight of dinar with euro, in order to ensure a better managing of the foreign exchange risk and fluctuations.