Uncertainty and monetary policy during the Covid-19 pandemic in Tunisia: Evidence from a Bayesian VAR

Abstract

This paper aims to examine the impact of the uncertainty shock on the Tunisian economy and the effectiveness of monetary policy during the Covid-19 pandemic. For this purpose, we employ a Bayesian VAR model considering the world uncertainty index (WUI) as a new proxy for uncertainty measure and the short-term interest rate as the main instrument of monetary policy. The results indicate that the Covid-19 uncertainty shock has a negative consequence on economic activity and on aggregate demand in Tunisia. Moreover, we show that conventional monetary policy is ineffective in times of high uncertainty period.

Keywords

• covid-19
• uncertainty
• monetary policy
• bvar model
• impulse response