On the Drivers of Inflation in Sub-Saharan Africa

29 Pages Posted: 14 Sep 2015

See all articles by Anh D. M. Nguyen

Anh D. M. Nguyen

Bank of Lithuania

Jemma Dridi

International Monetary Fund (IMF)

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department

Oral H. Williams

International Monetary Fund (IMF)

Date Written: August 2015

Abstract

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.

Keywords: Global VAR (GVAR), supply, supply shocks, demand, Time-Series Models, Monetary Policy (Targets, Instruments, and Effects), General, Sub-Saharan Africa.,

JEL Classification: C32, E31, E52, F40

Suggested Citation

Nguyen, Anh D. M. and Dridi, Jemma and Unsal, D. Filiz and Williams, Oral H., On the Drivers of Inflation in Sub-Saharan Africa (August 2015). IMF Working Paper No. 15/189, Available at SSRN: https://ssrn.com/abstract=2659546

Anh D. M. Nguyen (Contact Author)

Bank of Lithuania ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

Jemma Dridi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Oral H. Williams

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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