Inflation and Monetary Policy in a Low-Income and Fragile State: The Case of Guinea

IMF Working Papers, April 21, 2023

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Study period: since the early 2000s.
Country context: Guinea experienced major shocks from pandemics, commodity price movements, and multiple military coups.
Historical inflation environment: inflation averaged 12 percent over the sample period.
Objective: estimate the drivers of inflation in Guinea and assess monetary policy contributions.

Global commodity and transport prices:
- Account for a large share of the variation in inflation.
Monetary policy shocks:
- Contribution to inflation is described as moderate, reflecting a broadly neutral stance throughout most of the last two decades.
- Monetary policy has occasionally made larger contributions to inflation.
- Recently, monetary policy helped contain price pressures from high commodity prices.
Transmission mechanism:
- The effectiveness of monetary policy reflects a strong relationship between monetary aggregates and the exchange rate.

External shocks (global commodity and transport prices) are primary drivers of inflation and thus limit the extent to which domestic monetary policy alone can stabilize prices.
A broadly neutral monetary stance over most of the last two decades corresponded with a moderate direct contribution of monetary shocks to inflation, but episodic domestic policy actions can still have sizable effects.
Maintaining or strengthening the link between monetary aggregates and the exchange rate can enhance monetary policy effectiveness in containing externally driven price pressures.