LAUSR

The main objective of this paper is to shed new light on the nonlinear relationship between exchange rate changes and trade balance. Different from previous studies, this study applies the threshold regression approach of Hansen (J Econometr 93:345–368, 1999; Econometrica 68:575–603, 2000) to explore whether there exist threshold levels of depreciation (or appreciation) in the exchange rate-trade balance nexus. The approach is implemented using data on bilateral trade between Tunisia and 17 of its major trade partners over the period 1984–2016. The findings of this study confirm a non-linear relationship between exchange rate changes and trade balance in Tunisia. More specifically, the results show that above a certain critical value while dinar appreciation will worsen Tunisia’s trade balance, dinar depreciation will improve it.