On the Drivers of Inflation in Sub-Saharan Africa
IMF Working Papers, August 5, 2015
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Bibliographic details
- Authors: Anh D. M. Nguyen, Jemma Dridi, Filiz D Unsal, Oral Williams
- Published: August 5, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513583013.001
Summary
- Study motivation: 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. Recent developments—SSA’s rapid growth, its integration with the global economy, and changes in policy frameworks—suggest the drivers of inflation may have changed.
- Objective: Quantitatively analyze inflation dynamics in SSA using a Global VAR (GVAR) model that incorporates trade and financial linkages among economies, and the role of regional and global demand and inflationary spillovers.
- Key model features: Global VAR model capturing trade and financial linkages and regional/global demand and inflationary spillovers.
Main findings
- Historical drivers (past 25 years):
- The main drivers of inflation have been domestic supply shocks and shocks to exchange rate and monetary variables.
- Recent changes (over the last decade):
- The contribution of domestic supply shocks and exchange rate/monetary shocks to inflation has fallen.
- Domestic demand pressures have played a larger role.
- Global shocks, particularly shocks to output, have played a larger role in driving inflation.
- Heterogeneity across countries:
- Country characteristics matter in explaining the role of shocks.
- Relevant characteristics include the extent of oil and food imports, vulnerability to weather shocks, economic importance of agriculture, trade openness, and policy regime.
Policy implications and interpretation
- The reduced dominance of supply and exchange rate/monetary shocks in recent years implies that:
- Monetary policy may have a more relevant role than commonly perceived, given rising importance of domestic demand pressures and global output shocks.
- Policy design should account for:
- Country-specific characteristics (oil and food import dependence, weather vulnerability, agricultural importance, trade openness, policy regime) when assessing inflation drivers and the likely effectiveness of monetary policy.