How Does Financial Openness Impact Economic Growth in Tunisia? Insights from an ARDL Model

This paper examines the short and long run dynamics between capital account liberalization and economic growth in Tunisia over the period 1984-2019. Based on the AutoRegressive Distributed Lag (ARDL) method of Pesaran et al. (2001) and causality tests of Toda and Yamamoto (1995), we find evidence supporting a long-run cointegration relationship between capital account liberalization and economic growth. However, the short-run effects are more limited, with causality running from economic growth to financial liberalization. This result is explained by the importance of the Tunisian authorities continuing to adopt financial and institutional reforms in a prudent, gradual, and orderly manner, in order to meet some of the preconditions required for the implementation of external financial liberalization. Moreover, the study also analyzes the role of institutions, as both the level and quality of institutional development condition the impact of financial liberalization on economic growth. In fact, in our study, one of the two main channels through which capital account liberalization affects economic growth is precisely the level of financial development resulting from the various reforms undertaken.