Inflation Dynamics in Zambia
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Date
2022-04
Authors
Chipili, Jonathan M.
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Abstract
This study assesses the drivers of overall inflation in Zambia over the period 1994q1-
2019q4. A single-error correction model is used in which the underlying determinants
of both food and non-food components of inflation as well as supply constraints are
incorporated in the overall inflation equation. The empirical results show that, in the
long-run, the sources of overall inflation are determined in the external sector market
where the exchange rate and world non-food prices drive domestic prices. In the
short-run, overall inflation is influenced by the depreciation of the Kwacha, increases
in energy prices, imported inflation from South Africa, and increases in maize prices
(supply constraints). Overall inflation exhibits persistence and seasonality. Further,
the two sub-components of inflation display different characteristic behavior. This
underscores the importance of employing a disaggregated approach in modelling
inflation to improve information content and policy response. Three policy lessons can
be drawn from these empirical results. Firstly, the dominant influence of the exchange
rate on overall inflation and its sub-components requires a firm policy strategy to
maintain stability in the exchange rate. Secondly, expanding and diversifying the
manufacturing base to limit the current high dependence on imports of final consumer
and capital goods from South Africa should be prioritised. Finally, the role of supply
shocks—evident in the impact of maize prices on inflation—necessitates immediate
significant reforms in the agriculture sector to boost productivity through the use
of modern techniques such as irrigation in order to reduce dependence on rain fed
practices.
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Keywords
nflation, supply constraints, single-error correction model