Description

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.

More publications in this series: Working Papers

More publications by: Anh D. M. Nguyen ; Jemma Dridi ; Filiz Unsal ; Oral Williams