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In this paper, we argue that inflation targeting could be the future of Tunisia’s monetary policy. Monetary targeting has proven to be ineffective due to the composition of reserve money, structural liquidity deficit, and higher instability of the money multiplier after 2010. Exchange rate targeting is no longer feasible due to the level of international reserves, current account deficit, and inflation differentials with main trading partners. The Central Bank of Tunisia has already made important progress toward inflation targeting. The paper evidences the existence of increasingly effective interest rate transmission as well as the changing exchange rate passthrough to inflation with the gradual move toward further exchange rate flexibility.

Banks and Banking --- Foreign Exchange --- Inflation --- Money and Monetary Policy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Current Account Adjustment --- Short-term Capital Movements --- Interest Rates: Determination, Term Structure, and Effects --- Price Level --- Deflation --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Monetary Policy --- Monetary economics --- Banking --- Macroeconomics --- Currency --- Foreign exchange --- Central bank policy rate --- Monetary base --- Exchange rates --- Monetary policy frameworks --- Financial services --- Prices --- Money --- Monetary policy --- Interest rates --- Money supply --- Tunisia