Understanding Inflation Inertia in Angola

IMF Working Papers, May 1, 2009

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Publication title: Understanding Inflation Inertia in Angola
Authors: Alexander Y Kyei, Nir Klein
Date: May 1, 2009
Summary: In recent years, the decline in inflation in Angola has stalled and further steps may be needed to attain the authorities' medium term goal of meeting the Southern African Development Community (SADC) convergence criteria of a low single digit inflation rate. A Vector Error Correction (VEC) model, which analyzes the factors that affect the inflationary process in Angola, suggests that the inflation path has been largely affected by exchange rate movements. Additionally, the analysis shows that excess liquidity, which is measured by positive deviations of M2 from its equilibrium level, adds to demand pressures, and contributes to inflation with a lag.

The decline in inflation in Angola has stalled in recent years.
A Vector Error Correction (VEC) model indicates the inflation path has been largely affected by exchange rate movements.
Excess liquidity (measured by positive deviations of M2 from its equilibrium level) adds to demand pressures and contributes to inflation with a lag.
Exchange rate movements influence the price of imports and liquidity injection by the National Bank of Angola (BNA).

Greater exchange rate flexibility that facilitates a gradual appreciation would be instrumental to moderate price growth through:
- reducing the price of imports, and
- limiting liquidity injection by the National Bank of Angola (BNA).
Closely monitor the growth of monetary aggregates (including M2).
Improve liquidity management to mitigate lagged inflationary effects of excess liquidity.