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We investigate the response of aggregate demand (AD) components and inflation to monetary policy (MP) shocks in the Tunisian context where studies on this issue are rare. By estimating SVAR models on historical data ending in 2021, we found that: i) The Tunisian Central Bank's (TCB) efforts to control inflation through interest rate tightening end up significantly slowing down private investment and consumption, while inflation response is not enough to mitigate the recently exacerbated inflationary trend; ii) Such efforts are hampered, if not outweighed, by the "pass-through" effect associated with exchange-rate continued depreciation; iii) The interest rate is Granger-caused by the exchange rate rather than the inflation rate, suggesting that de jure and de facto objectives of the TCB are divergent; and iv) The continued exchange rate depreciation alone is not enough to address the structural trade deficit. In light of these findings, we suggest that i) The transition from a discretionary MP to a rule-based inflation-targeting MP and with a well-defined role for the exchange rate, would help TCB gain credibility and improve efficiency of its MP; and ii) Tunisian policymakers should also consider consolidating MP in achieving its price stabilization objective particularly through implementing "supply-side policy" actions aiming at promoting economic growth and addressing unsustainable fiscal and external imbalances. [ABSTRACT FROM AUTHOR]

The literature has always considered that the natural selection mechanism will eliminate all inefficient firms from the market and that only efficient ones will survive which will increase the aggregated efficiency of the market. By assuming that firms differ not only by their efficiency levels but by their opportunity costs too. This paper argues that the selection mechanism will lead the most efficient firms to exit and the inefficient ones to persist in the equilibrium, which may explain the persistence of inefficient firms observed in many empirical studies. [ABSTRACT FROM AUTHOR]