Optimal Monetary Policy Under Inflation Targeting in Tunisia: New Keynesian Model

Abstract

This article analyzes monetary policy under inflation targeting in a developing economy using a hybrid new Keynesian model to determine the optimal policy rule. Firstly, we estimate the model's parameters using a Bayesian approach with data from the Tunisian economy from 2000 Q1 to 2020 Q4. Then, we solve an optimization problem to evaluate different types of monetary policy rules within the framework of two inflation-targeting regimes. The results show that a forward-looking rule with interest rate smoothing minimizes welfare loss most effectively within a strict inflation-targeting framework.