Sources of Inflation in Sub-Saharan Africa

IMF Working Papers, February 1, 2007

Source details

The paper examines the relationship between inflation, the output gap, and the real money gap for seventeen African countries.
Using heterogeneous panel cointegration estimation techniques, the authors estimate cointegrating vectors for the production function and the real money demand function to recover structural output and money gaps.
Central finding: both the output gap and the money gap contain significant information regarding the evolution of inflation, with a larger role played by the money gap.
The analysis finds no significant evidence of asymmetry in the relationship between inflation and the two gaps.

Estimation approach: heterogeneous panel cointegration estimation techniques.
Variables and constructs explicitly used:
- Production function (to recover structural output and output gap).
- Real money demand function (to recover real money gap).
- Inflation as the dependent variable explained by the recovered gaps.
Sample: seventeen African countries (as described in the paper).

Both demand-side (output gap) and monetary (real money gap) indicators provide significant information on inflation dynamics in Sub-Saharan Africa.
The larger role of the money gap implies that monetary variables and money demand dynamics should be central to inflation monitoring and policy frameworks in the region.
Absence of significant asymmetry suggests symmetric policy responses to positive and negative deviations in the gaps may be appropriate based on the empirical evidence in this study.

5. A Simple Asymmetric Model
- 5. A Simple Asymmetric Model (Markdown version)
- 5. A Simple Asymmetric Model (PDF)