Inflation Control and Banking Systems: The Case of Tunisia

Tunisia is a developing country with embryonic bank regulations. Moving to a full-fledged inflation-control monetary policy requires market-determined interest rates and withdrawing the policy of implicit deposit insurance. This shift might destabilize economic activity. This need not be the case. Tunisia does not have institutions for appropriate banking regulations and transparent monetary policy, but it has some well-performing banks. Using panel data on Tunisian and Turkish banks, I show that banks with low profit rates have poorer management. Thus, the creation of appropriate institutions and laws would force delinquent banks to improve their governance.