Disaggregated Short-Term Inflation Forecast (STIF) for Monetary Policy Decision in Sierra Leone

Jackson, Emerson Abraham and Tamuke, Edmund and Jabbie, Mohamed (2019): Disaggregated Short-Term Inflation Forecast (STIF) for Monetary Policy Decision in Sierra Leone. Published in: Financial Markets, Institutions and Risk (FMIR) , Vol. 3, No. 4 (31 November 2019): pp. 36-52.

Abstract

In this paper, the researchers have developed a short term inflation forecasting (STIF) model using Box-Jenkins time series approach (ARIMA) for analysing inflation and associated risks in Sierra Leone. The model is aided with fan charts for all thirteen components, including the Headline CPI as communication tools to inform the general public about uncertainties that surround price dynamics in Sierra Leone – this then make it possible for policy makers to utilise expert judgments in a bid to stabilize the economy. The uniqueness of this paper is its interpretation of risks to each of the disaggregated components, while also improving credibility of decisions taken by policy makers at the Bank of Sierra Leone [BSL]. Empirically, Food and Non-Alcoholic Beverages, Housing and Health components indicate that shock arising from within or outside of Sierra Leone can significantly impact headline CPI, with immediate pass-through effect of high prices on consumers’ spending, at least in the short-run. The outcome of this empirical research shows uniqueness of the disaggregated model in tailoring policy makers’ attention towards targeting sector-specific policy interventions. Fan Charts produced have also highlighted degree of risks, which is based on confidence bands, which shows deviation from the baseline forecast. The ultimate goal is to improve sectoral productive capacity, while at the same time, monitoring price volatility spill-over through empirical disaggregation of the CPI basket – in association with this, outcome from the study also shows that the use of multivariate models like VAR would be welcome to monitor events on price dynamics in the national economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: STIF; ARIMA; Disaggregated CPI; Fan Charts; Sierra Leone
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

References

Bangura, M., Caulker, E. and Pessima, S. (2012). Exchange Rate Pass-Through to Inflation in Sierra Leone: A Structural Vector Autoregressive Approach. Journal of Monetary and Economic Integration, Vol. 12(1): pp. 93-123.

Bank of Sierra Leone. (2019). The Bank of Sierra Leone Act 2019. Available at: http://www.bsl.gov.sl/Bank%20of%20Sierra%20Leone%20Ascent%202019.pdf. (Accessed: 30th July, 2019).

Benalal, N., Diaz del Hoyo, J.L., Landau, B., Roma, M. and Skudelny, F. (2004). “To aggregatet or not to aggregate? Euro area inflation forecasting? Working Paper 374, European Central Bank.

Box, G. E. P., and Jenkins, G. M. (1976). Time Series Analysis: Forecasting and Control. San Francisco: Holden-Day Inc.

Coleman, W. O. (2007), “The Cause, Costs and Compensation of Inflation”, Edward Elgar.

Kji Espasa, A., Senra, E. and Albacete, R. (2002). “Forecasting Inflation in the European Monetary Union: A disaggregated approach by countries and by sectors”. European Journal of Finance, Vol. 8(4): pp. 402-421.

Gordon, J.R.J. (1977). "The Theory of Domestic Inflation", Amsterdam, Elsevier Science, Journal of Economic Review, Vol. 67(1): pp. 128–34.

Hubrich, K. (2005). “Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?”. International Journal of Forecasting, Vol. 21(1): pp. 119-136.

Harvey, S.K. (2012). Essays in inflation and monetary dynamics in developing countries. Doctoral Thesis, University of Nebraska, Lincoln.

Humphrey, T.M. (1998). "Historical Origins of the Cost-Push Fallacy", Richmond, Federal Reserve Bank of Richmond Economic Quarterly, Vol. 84(3): pp. 53–74.

Jackson, E.A., Jabbie, M., and Tamuke, E. (forthcoming). Dynamic effect of inflation shocks in Sierra Leone: An empirical analysis.

Jackson, E.A., and Tamuke, E. (forthcoming). Predicting disaggregated tourist arrivals in Sierra Leone using ARIMA Model.

Jackson, E.A. (2019). Systemic Health Care Failure as a Symptom of Market Failure in Sierra Leone. South African Journal of Public Health, Vol. 3(4): pp. 72-78.

Jackson, E.A., and Jabbie, M. (forthcoming). Twin Deficits hypothesis as an indication of government failure in Sierra Leone: An empirical investigation (2007 to 2018).

Jackson, E.A., and Tamuke, E. (2019). Predicting Disaggregated Tourist Arrivals in Sierra Leone using ARIMA Model. DOI: 10.20944/preprints201909.0102.v1.

Jackson, E.A. and Jabbie, M. (2019). Understanding Market Failure in the Developing Country Context (Online First). In, Walter L. Filho (eds), Decent Work and Economic Growth: Encyclopedia of Sustainable Development Goals, Springer Nature Publisher. DOI: 10.1007/978-3-319-71058-7_44-1.

Jackson, E.A. (2018). Comparison between Static and Dynamic Forecast in Autoregressive Integrated Moving Average for Seasonally Adjusted Headline Consumer Price Index. Available at SSRN: http://dx.doi.org/10.2139/ssrn.3162606.

Jackson, E.A., Tamuke, E., and Sillah, A. (2018). Modelling Monthly Headline Consumer Price Index (HCPI) through Seasonal Box-Jenkins Methodology. International Journal of Sciences 7 (1), 51-56.

Jackson, E.A. and Tamuke, E. (2018). Probability Forecast Using Fan Chart Analysis: A Case of the Sierra Leone Economy. Journal of Advanced Studies in Finance, Vol. 9(1): p. 34-44.

Lim, C.H and Papi, L. (1997). An Econometric Analysis of the Determinants of Inflation in Turkey. IMF Working Paper, No. WP/97/170.

Mansaray-Pearce, E.A. and Liu, P. (2015). The Determinants of Inflation in Sierra Leone: A Cointegration Analysis. Journal of Economics and Sustainable Development, Vol. 6(6): pp. 121-131.

Kallon, K. 1994. An econometric analysis of inflation in Sierra Leone. Journal of African Economies, 3(2): 199–230.

King, M. 2005. “Monetary Policy: Practice Ahead of Theory. Bank of England”. Mais Lecture of Economics and Finance Vol. 3-4/2008.

Mansaray-Pearce, E.A. and Liu, P. (2015). The Determinants of Inflation in Sierra Leone: A Cointegration Analysis. Journal of Economics and Sustainable Development, Vol. 6(6): pp. 121-131.

Montiel, P.J. (1989). "Empirical Analysis of High-Inflation Episodes in Argentina and Brazil", Washington. D. C, International Monetary Fund (IMF), Staff Papers, 36(3): pp. 527–549.

Mordi, C.N.O., Adebiyi, M.A., and Adamgbe, E.T. (2012). SHORT TERM INFLATION FORECASTING FOR MONETARY POLICY IN NIGERIA. Central Bank of Nigeria (CBN).

Mwenese, B., and Kwizera, A.P. (2018). Modelling and Forecasting Inflation Dynamics in Rwanda. BNR Economic Review, Vol. 13: pp. 45 – 71.

Prescatori, A. and S. Zaman. 2011. “Macroeconomic Models, Forecasting and Policymaking”. Economic Commentary No. 19. Cleveland: Federal Reserve Bank of Cleveland.

Rodrik, D. (1991). “Premature Liberalization, Incomplete Stabilization: The Ozal Decade in Turkey”, in Lessons of Economic Stabilization and its Aftermath, ed. M. Bruno, S. Fischer, E. Helpman, and N. Liviatan with L. Meridor (Cambridge, Mass, and London: MIT Press).

Rummel, O. (2011). “A Short-term inflation forecast for South Africa”, Economic Modelling and Forecasting, Pages 1-15. Centre for Central Banking Studies, Bank of England.

Salam, M. A., S. Salam and Feridun, M. (2006). Forecasting Inflation in Developing Nations: The Case of Pakistan, International Research Journal of Finance and Economics, EuroJournals Publishing, Inc., Issue 3.

Sargent, T.J and Wallace, N. (1981). "Some Unpleasant Monetarist Arithmetic", Minneapolis, Federal Reserve Bank of Minneapolis, Journal of Quarterly Review, Vol. 5: pp. 1-17.

Sims, C.A. (1980). "A Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered", Amsterdam, Elsevier Science, and Journal of Economic Review, Annual Papers and Proceedings 70: pp. 250-257.

Statistics Sierra Leone [SSL] (2018). Consumer Price Index December 2018 Press Release. Available at: https://www.statistics.sl/images/StatisticsSL/Documents/cpi/2018/cpi_press_release_december_2018.pdf. (Accessed: 8th February, 2019).

Tamuke, E., Jackson, E.A. and Sillah, A. (2018). Forecasting inflation in Sierra Leone using ARIMIA and ARIMAX: A comparative evaluation. Theoretical and Practical Research in Economic Field, (Volume IX, Summer), 1(17): pp. 63-74.

Totonchi, J. (2011). Macroeconomic Theories of Inflation. International Conference on Economics and Finance Research (IPEDR), Vol. 4(2011): pp. 459 – 462.