Appropriateness of inflation targeting as monetary policy framework for Zambia
type: CreativeWork
description: There is now consensus that inflation hampers economic and social development. It is therefore important to have a clearly defined and effective framework of inflation control. Since 1992, Zambia has been using monetary targeting as a framework of inflation control. However, the link between inflation and monetary aggregates is no longer stable and predictable. In this vein, the Bank of Zambia has been considering switching the monetary policy framework to inflation targeting. The objective of this research is to assess the applicability of this framework by investigating the factors that drive inflation. Inflation targeting works best if inflation is demand driven while the effects of supply side factors on inflation are temporary. Further, it must be possible to use a nominal interest rate as a monetary policy instrument. Using annual data from 1992 to 2008, we fit the standard model of inflation targeting by Svensson (1997) and then compare it to the Chand and Singh (2006) model. The Chand and Singh model reformulates the Svensson demand side to what is thought to better depict the economic structure of developing countries. The model recognizes that developing countries usually sustain large fiscal deficits which can be significant in driving inflation. To this end, the policy rule of interest rate should also respond to fiscal deficit ratio. Alternatively, fiscal deficit ratio itself can be used as a policy rule. Moreover, the Chand and Singh model also includes supply side factors with the reasoning that they might be significant in explaining inflation. Our results show that inflation in Zambia can be said to be demand driven and supply side factors are insignificant. However, the interpretation of aggregate demand in terms of output gap was found to be insignificant in driving inflation. Instead, the alternative interpretation, nominal excess demand growth was found to have more explanatory power. Fiscal deficit ratio was found to be insignificant. This prec…
abstract: There is now consensus that inflation hampers economic and social development. It is therefore important to have a clearly defined and effective framework of inflation control. Since 1992, Zambia has been using monetary targeting as a framework of inflation control. However, the link between inflation and monetary aggregates is no longer stable and predictable. In this vein, the Bank of Zambia has been considering switching the monetary policy framework to inflation targeting. The objective of this research is to assess the applicability of this framework by investigating the factors that drive inflation. Inflation targeting works best if inflation is demand driven while the effects of supply side factors on inflation are temporary. Further, it must be possible to use a nominal interest rate as a monetary policy instrument. Using annual data from 1992 to 2008, we fit the standard model of inflation targeting by Svensson (1997) and then compare it to the Chand and Singh (2006) model. The Chand and Singh model reformulates the Svensson demand side to what is thought to better depict the economic structure of developing countries. The model recognizes that developing countries usually sustain large fiscal deficits which can be significant in driving inflation. To this end, the policy rule of interest rate should also respond to fiscal deficit ratio. Alternatively, fiscal deficit ratio itself can be used as a policy rule. Moreover, the Chand and Singh model also includes supply side factors with the reasoning that they might be significant in explaining inflation. Our results show that inflation in Zambia can be said to be demand driven and supply side factors are insignificant. However, the interpretation of aggregate demand in terms of output gap was found to be insignificant in driving inflation. Instead, the alternative interpretation, nominal excess demand growth was found to have more explanatory power. Fiscal deficit ratio was found to be insignificant. This prec…
author: Hangoma, Peter
language: en
keywords: Inflation, Inflation Policy-Zambia
date published: 2011-04-06
date modified: 2026-07-27T22:06:47Z
provider: University of Zimbabwe
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: University of Zimbabwe