Exchange Rate and Inflation Dynamics in a Resource Rich Setting: The Case of Zambia

Roger, Lionel; Smith, Gregory; Morrissey, Oliver

Abstract

This paper investigates the relationship between copper prices, the exchange rate and consumer price inflation in Zambia using a structural vector autoregression with quarterly data for 1995–2014 and a combination of sign and zero restrictions to identify relevant global and domestic shocks. The paper makes two contributions. First, it provides new measures of exchange rate pass through (ERPT), based on less restrictive assumptions than previous estimates, to show how changes in the value of the kwacha are reflected in changes in consumer prices (distinguishing food and non‐food inflation). Second, the ERPT is disaggregated to demonstrate that measured ERPT depends on the nature of the shock, with implications for policy responses. Although the price of copper is the most important driver of the exchange rate, the fluctuations it caused are associated with a low pass‐through of about 7% (consistent with a period of relatively low inflation). Exchange rate fluctuations caused by monetary shocks, in contrast, come with a pass‐through of up to 25% (and even more for food prices). A fast response by monetary authorities can mitigate the adverse effects of exchange rate shocks.

Citation

Roger, L., Smith, G., & Morrissey, O. (2019). Exchange Rate and Inflation Dynamics in a Resource Rich Setting: The Case of Zambia. South African Journal of Economics, 87(4), 490-514. https://doi.org/10.1111/saje.12236

• Journal Article Type: Article
• Acceptance Date: Jun 18, 2019
• Online Publication Date: Oct 17, 2019
• Publication Date: 2019-12
• Deposit Date: Sep 6, 2019
• Publicly Available Date: Oct 18, 2021
• Journal: South African Journal of Economics
• Print ISSN: 0038-2280
• Electronic ISSN: 1813-6982
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 87
• Issue: 4
• Pages: 490-514
• DOI: https://doi.org/10.1111/saje.12236
• Keywords: Copper Prices; Exchange Rate Pass Through; Zambia
• Public URL: https://nottingham-repository.worktribe.com/output/2579453
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/saje.12236
• Additional Information: This is the peer reviewed version of the following article: Roger, L., Smith, G. and Morrissey, O. (2019), Exchange Rate and Inflation Dynamics in a Resource Rich Setting: The Case of Zambia. South African Journal of Economics, 87: 490-514. doi:10.1111/saje.12236which has been published in final form at https://doi.org/10.1111/saje.12236. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
• Contract Date: Sep 6, 2019