Financial stability and monetary policy rules: evidence from Tunisia

Abstract

This paper aims to identify the role of monetary policy in ensuring not only price stability but also financial stability for the central bank of Tunisia. We employ the generalized method of moments on quarterly data during the period 2000-2020 for the Tunisian context to estimate various types of monetary policy rules. We compare the standard Taylor rule with the augmented version that incorporates non-performing loans as a financial variable. Our findings indicate a significant and positive impact of this variable on the monetary policy reaction function. Furthermore, our analysis highlights the ability of monetary policy to effectively balance the trade-off between its dual objectives of price and financial stability.

Keywords

• monetary policy
• financial stability
• taylor rule
• gmm model