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This study assesses the actual monetary policy stance in three countries in the MENA region, namely, Tunisia (between 2000 and 2017) and Egypt and Morocco (between 2007 and 2017), based on the Taylor rule framework. Especially, it explores the impact of transition periods and high uncertainties following the so-called Arab Spring on the central bank decision-making process. The results provide no strong evidence in favor of rule-based monetary strategies on the part of the central banks in these countries, which still largely rely on discretion when deciding their policy rates. Nevertheless, they show a remarkable presence of interest rate inertia in the policymaking of these monetary authorities. Moreover, our findings reveal a strong dependence of the policy rates in Tunisia and Egypt on the variations of exchange rates, especially during the agitated and inflationary periods of transition. However, some signs of an orientation toward rule-based policies seem to arise in case of Tunisia and Morocco in the transition period, with increased sensitivity of short-term interest rate to inflation gap in the former and to output gap in case of the latter country; yet the confirmation of this evolution requires more time. Furthermore, the estimation of a threshold model where the threshold variable is allowed to vary over time demonstrates the existence of certain opportunistic behavior on the part of the central banks of Tunisia and Egypt. The responsiveness of their monetary policies is more intense when the inflation rate exceeds a certain intermediate target.

Monetary policy in times of uncertainties: evidence from Tunisia, Egypt and Morocco