Cyclical components and dual long memory in the foreign exchange rate dynamics: The Tunisian case

The purpose of this paper is to question the traditional conventional view on the exchange rate targeting that real shocks have permanent effect on exchange rates (FX) however nominal shocks are not. Thus, an empirical approach is proposed in order to analyze the transitory component dynamics of some major Tunisian interbank FX rates for the period 199-205. Our results reveal that the use of the Guy and Amant’s (205) method allows us to select the Hodrick Prescot with two powers as an optimal filter for extracting the daily interbank FX rates’ cyclical components. More importantly, the joint estimations of an ARFIMA model in the mean equation and various long-memory GARCH-type models in the variance equations reveal that cyclical components seems to be well described by dual long memory models. On the practical side, our findings provide important evidence that transitory trend fluctuations are not quickly trend? reverting but they are rather dominated by permanent deviations from the equilibrium values. Accordingly, contrary to policy makers’ ambitions for the Tunisian dinar, our study appears to confirm the view that monetary shocks may also (as for real shocks) be a difficult task of stabilization policy. This result may have several important implications for monetary policy in most developing countries.