Determinants of Inflation in Sierra Leone

Jackson, Emerson Abraham and Kamara, Purity and Kamara, Abdulsalam (2022): Determinants of Inflation in Sierra Leone.

Abstract

This paper examines the determinants of inflation in Sierra Leone using monthly time series data from 2010M1 to 2021M12, with the application of the ARDL model. The emphasis of the empirical study as outlined in the objectives is to examine both supply-side and demand-side pressure as observed in the outcome of the short and long-run relationships. Taking into account the characteristics of the Sierra Leonean economy, which is also backed by recent studies on inflation dynamics, the constructed ARDL model emphasizes the effects of the exchange rate, RGDP, Fiscal Balance (FBAL), Currency in Circulation, and Lending Rate (LR) factors on inflation dynamics in the economy. The empirical results show that in the long-run, the main determinants of inflation in Sierra Leone are the exchange rate, Real Gross Domestic Product (RGDP), Fiscal Balance, Currency in Circulation, and Lending Rate. In the short run, all the variables except RGDP and Exchange Rate manifested significant effects on inflation dynamics. Finally, the error correction term (-0.063) was proven to be negative and statistically significant, thereby suggesting the rapid rate of adjustment to its long-run state

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation Targeting, Supply-Side, Demand-Side, Shocks, Sierra Leone
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Adu, G., & Marbuah, G. (2011). Determinants of Inflation in Ghana: An Empirical Investigation. South African Journal of Economics, 79(3), 251-269.

Anaman, E.A. (2019). Examining the Factors Underlining the Inflationary Phenomenon in Ghana – A Dynamic ARDL Analysis. Journal of Business and Economic Development, 4(2), 53-63. https://doi.org/10.11648/j.jbed.20190402.13.

Argy, V. (1970). Structural inflation in Developing Countries. Oxford Economic Papers, 22(1), 73-85. Retrieved February, 15, 2022 from https://doi.org/10.1093/oxfordjournals.oep.a041153.

Bane J. (2018). Dynamics and Determinants of Inflation in Ethiopia. In: Heshmati A., Yoon H. (eds) Economic Growth and Development in Ethiopia. Perspectives on Development in the Middle East and North Africa (MENA) Region. Springer, Singapore. https://doi.org/10.1007/978-981-10-8126-2_4.

Bangura, M., Denison-George, C., and Caulker, R. (2013). The impact of Exchange Rate Dynamics on the Trade Balance in Sierra Leone: An ARDL Cointegration Approach. Journal of Monetary and Economic Integration, 13(1), 64-88.

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, 12 (1), pp. 93-123.

Baumol, W. 1967. "Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crises," AER, 57(3), 415-26.

Bobeica, E., & Hartwig, B. (2022). The COVID-19 shock and challenges for inflation modelling. International Journal of Forecasting, 2022. https://doi.org/10.1016/j.ijforecast.2022.01.002.

Brown, R.L., Durbin, J., & Evans, J.M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society. Series B (Methodology), 37(2), 149-192.

BSL. (2019). The Bank of Sierra Leone Act 2019. Retrieved December 19, 2021, from http://www.bsl.gov.sl/Bank%20of%20Sierra%20Leone%20Ascent%202019.pdf.

Engle, R.F., and Granger, C.W.J (1987) 'Cointegration and error correction: representation, estimation and testing', Econometrica, 55, 251-276.

Friedman, M. (1970). "A Theoretical Framework for Monetary Analysis," JPE, (March/ April), 78(2): 193-238.

Friedman, M. (1972). "A Monetary Theory of Nominal Income," JPE, (March/April), 79(2): 323-37.

Frisch, H. (1990). Theories of Inflation – Cambridge Survey of Economic Literatures. United Kingdom: Cambridge University Press.

Global Economics (Online). The Phillips Curve. Retrieved February 116, 2022 from https://www.economicsonline.co.uk/Global_economics/Phillips_curve.html.

Inim, V., Samuel, U.E., & Prince, A.I. (2020). Other Determinants of Inflation in Nigeria. European Journal of Sustainable Development, 9(2), 338-348. https://doi.org/10.14207/ejsd.2020.v9n2p338.

Jackson, E.A., Tamuke, E., Jabbie, M., & Ngombu, A. (2020). Adoption of Inflation Targeting in Sierra Leone: An Empirical Discourse. Journal of Economic Policy Researches, 7(2), 21-50. https://doi.org/10.26650/JEPR735604.

Jackson, E.A., Tamuke, E., & Jabbie, M. (2019). Dynamic Effect of Inflation Shocks in Sierra Leone: An Empirical Analysis. Journal of Advanced Studies in Finance, 10(2), 73-91. https://doi.org/10.14505//jasf.v10.2(20).01.

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. https://doi.org/10.14505/jasf.v9.1(17).04.

Jahan, S., Mahmud, A.S., & Papageorgiou, C. (2014). What is Keynesian Economics? Finance and Development, IMF. Retrieved, February 15, 2022, from https://www.imf.org/external/pubs/ft/fandd/2014/09/pdf/basics.pdf.

Johansen S., and Juselius K (1990) Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bulletin of Economics and Statistics 52:169–210.

Kallon, K.M. (2004). The political economy of corruption in Sierra Leone. Lewiston, NY: E. Mellen.

Kallon, K.M. (1994). An Econometric Analysis of Inflation in Sierra Leone. Journal of African Economies, 3(2), 199-230. https://doi.org/10.1093/oxfordjournals.jae.a036804.

Khan, M.H., & Hanif, M.N. (2012). Role of Demand and Supply Shocks in Driving Inflation: A Case Study of Pakistan. State Bank of Pakistan, State Bank of Pakistan. Retrieved February 10, 2022, from https://mpra.ub.uni-muenchen.de/48884/1/MPRA_paper_48884.pdf.

Korsu, R.D. (2014). The Inflationary Effects of Fiscal Deficits in Sierra Leone: A Simulation Approach. AERC Research Paper 290. Retrieved February 9, 2022, from https://media.africaportal.org/documents/RP290.pdf.

Laurenceson, J, and C.H.. J Chai (2008) Financial Reform and Economic Development in China. Cheltenham, UK, Edward Elgar.

Luke, D. F., & Riley, S. P. (1989). The Politics of Economic Decline in Sierra Leone. The Journal of Modern African Studies, 27(1), 133–141. Retrieved February 10, 2022, from http://www.jstor.org/stable/161359.

Pesaran, M.H., Shin, Y., and Smith, R.J (2001) 'Bounds testing approaches to the analysis of level relationships', Journal of Applied Econometrics, 16: 289-326.

Phillips, A.W. (1958). "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957," Economica, 22(100): 283-99. Reprinted in Mueller, M.G., ed. 1971. Readings in Macroeconomics. New York: Holt, Rinehart and Winston, pp. 245-56.

Santacreu, A.M., & LaBelle, J. (2022). Global Supply Chain Disruptions and Inflation During the COVID-19 Pandemic. Federal Reserve Bank of St. Louis. Retrieved February 8, 2022, from https://files.stlouisfed.org/files/htdocs/publications/review/2022/02/07/global-supply-chain-disruptions-and-inflation-during-the-covid-19-pandemic.pdf.

Streeten, P. (1962). "Wages, Prices and Productivity," Kyklos, 15(4, 23-31.

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. https://ideas.repec.org/a/srs/jtpref/v9y2018i1p63-74.html.

Totonchi, J. (2011). Macroeconomic Theory of Inflation. International Conference on Economics and Finance Research, IACSAT Press. Vol. 2011:: pp. 459-462. Ubide, A. (1997). Determinants of Inflation in Mozambique. IMF Working Paper, WP/97/145.

Warburton, C.E.S., and Jackson, E.A. (2020). Monetary Policy Responses to Exogenous Perturbations: Energy Shocks and Monetary Policy in a Small Open Economy (Sierra Leone, 2007-2018). PSL Quarterly Review, Vol. 73(293): pp. 181–201. https://doi.org/10.13133/2037-3643_73.293_5.

Yildirim, M.O. (2021). What influences inflation expectations in Turkey? In, G. Kitabevi, THEORETICAL AND EMPIRICAL PERSPECTIVES ON ECONOMIC AND FINANCIAL ISSUESPublisher: Gazi Kitabevi Tic. Ltd. Şti. Retrieved February 11, 2022, from https://www.researchgate.net/profile/Mustafa-Ozan-Yildirim/publication/353923221_What_Influences_Inflation_Expectations_in_Turkey/links/611a03531e95fe241ad4a1d9/What-Influences-Inflation-Expectations-in-Turkey.pdf.