Credit Risk, Monetary Policy Efficacy and Economic Performance in Tunisia: Evidence from ARDL and Markov Regime Switching Models | New Advances in Business, Management and Economics Vol. 9

 

The historical swings between periods of excess credit risk and phase shifts of tranquil periods with relatively easier banking credit conditions stimulating investment up to a certain limit raised the debate of the prevalence of credit risk switching regimes of the type of Markov regime switching models for credit risk exerting a lagged effect on economic performance and drained by monetary policy efficacy breakpoint shifts. Credit risk is at its maximum during recessions because of the increase in the likelihood of non-repayment of loans as investments perform bad in terms of profitability. Credit risk is assessed in terms of risk premiums that encompass the historical effect credit performance exerts on the banking assessment board of creditworthiness. This instance of modeling credit risk is proven to exhibit both patterns, although contrasting apparently, but with breakpoints in the unit root of monetary policy will herald obvious and fathomable key features of recent economic events driven by financial shocks in Tunisia. The main purpose of the research is to scrutinize the impact of banking sector related effects on economic performance depending on credit to the public sector monetary policy efficacy and economic growth, in order to elucidate the relationship between financial shocks and economic performance and to forecast future short run evolution of economic situation starting from an ARDL model exhibiting the main determinants of credit risk then passing to the diagnostic of a Markov model with jump effect applied to credit risk in a time series.

 

The first model shows a positive autocorrelation of credit risk signaling plausible self-sustaining exacerbation, a positive correlation with credit to the public sector as a proportion of GDP, a lagged negative correlation with GDP growth and a negative correlation with monetary policy efficacy. Granger causality shows that credit risk Granger causes GDP growth with a lag of three years. When monetary policy efficacy improves output gap widens. This means that actual output is farther from potential output. Businesses are having a boom in sales because of the expansionary phase of the business cycle or a bust because recession. Empirical data and regression results for the case of Tunisia show the prevalence of a Markov switching regime for credit risk, validating the jump effect hypothesis corresponding with a lag to the collapse of economic performance and heralding a sharp decline in economic performance caused by a phase shift in monetary policy efficacy. The transition probabilities found empirically validate the hypothesis of a persistent hypothesis of a first tranquil regime and a jump effect highly turbulent regime with a severe pike like the one in 2008 whose excessive negative consequences for economic performance and socioeconomic unrest have shown up with a lag of three years round end 2010 at the onslaught of regional MENA economic and sociopolitical meltdowns. The study concluded that the probability of transition from regime one with jump to regime 2 with steady low credit risk is very significant, whereas the probability of transition from regime 2 to regime 1 is expected to be non-significant, which means that regime switches of financial and socioeconomic distress are not ascertained but when they happen the return to the steady state is ascertained.

 

 

Author(s) Details

Mohamed Miras Marzouki a
FSEGT Campus El Manar Tunis, Tunisia.

 

Mariem Mahmoud
FSEGT Campus El Manar Tunis, Tunisia.

 

Please see the book here:- https://doi.org/10.9734/bpi/nabme/v9/5978