On the Drivers of Inflation in Sub-Saharan Africa

Author/Editor:

Anh D. M. Nguyen ; Jemma Dridi ; Filiz D Unsal ; Oral Williams

Publication Date:

August 5, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The perception that inflation dynamics in Sub-Saharan Africa (SSA) are driven by supply shocks implies a limited role for monetary policy in influencing inflation in the short run. SSA’s rapid growth, its integration with the global economy, changes in the policy frameworks, among others, in the last decade suggest that the drivers of inflation may have changed. We quantitatively analyze inflation dynamics in SSA using a Global VAR model, which incorporates trade and financial linkages among economies, as well as the role of regional and global demand and inflationary spillovers. We find that in the past 25 years, the main drivers of inflation have been domestic supply shocks and shocks to exchange rate and monetary variables; but that, in recent years, the contribution of these shocks to inflation has fallen. Domestic demand pressures as well as global shocks, and particularly shocks to output, however, have played a larger role in driving inflation over the last decade. We also show that country characteristics matter—the extent of oil and food imports, vulnerability to weather shocks, economic importance of agriculture, trade openness and policy regime, among others, help in explaining the role of shocks.

Series:

Working Paper No. 15/189

Subject:

Angola Benin Botswana Burkina Faso Burundi Cameroon Central African Republic Chad Comoros Congo, Democratic Republic of the Congo, Republic of Djibouti Econometric models Equatorial Guinea Eritrea Ethiopia External shocks Gabon Gambia, The Ghana Guinea Guinea-Bissau Inflation Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mauritius Monetary policy Mozambique Namibia Niger Nigeria Rwanda Senegal Seychelles Sierra Leone South Africa Sub-Saharan Africa Sudan Supply and demand Swaziland Tanzania Togo Uganda Vector autoregression Zambia Zimbabwe

English

Publication Date:

August 5, 2015

ISBN/ISSN:

9781513583013/1018-5941

Stock No:

WPIEA2015189

Format:

Paper

Pages:

28

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