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Tight Money, Real Interest Rates, and Inflation in Sub-Saharan Africa Edward F. Buffie Full Text of this Article (PDF 141K) Abstract: The consequences
of tight monetary policy are analyzed in an optimizing currency-substitution model
of a small, open economy that operates under an open capital account and a flexible
exchange rate. There is a reasonably good fit between the dynamics generated by
the model and the stylized facts in the tight-money episodes that occurred in
Kenya in 1993 and Nigeria in 1989–91. The study's results shed light on
two issues: why tight money has provoked stupendous increases in inflation and
the real interest rate in some episodes, and whether tight money is a foolish,
unsustainable policy that always worsens the fiscal deficit and raises the inflation
rate in the long run. [JEL F41, E52, E63] |
