On the Drivers of Inflation in Sub-Saharan Africa

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.

Assessing Inflation Convergence in the East African Community

“…It happens in all EAC countries that foreign factors appear to contribute more to inflation fluctuations than domestic ones, as in line with Nguyen et al . (). This can be explained by increases in trade and financial openness in the area, making the economy more exposed to foreign factors as discussed in Section 2.…”

Inflation in Low-Income Countries

“…Supply shocks thus push inflation and output growth in opposite directions, tending to give rise to a conflict between monetary policy's primary objective of stabilizing prices and its secondary objectives of supporting growth and maintaining a narrow output gap. Stabilizing inflation in response to supply shocks may thus require the sacrifice of the secondary objectives of monetary policy (Nguyen et al 2017;Adam 2011;Bashar 2011). This contrasts with demand shocks, which are relatively less prevalent in LICs than in other country groups, where stabilizing inflation should simultaneously serve the objective of containing output and employment gaps ("divine coincidence") (Blanchard and Galí 2007).…”

Nigerian Economy: Business, Governance and Investment in Period of Crisis

“…As most analysts expected, the later liberalization of Naira in the foreign exchange market had link to inflation, at least in the short to medium term. According to an IMF study by Nguyen, Dridi, Unsal and Williams (2015), in the last 25 years, the main drivers of inflation in Africa had been domestic supply shocks and shocks to exchange rate and monetary variables. The study also observes 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".…”