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Exchange Rate and Inflation Dynamics in a Resource Rich Setting: The Case of Zambia
Author(s) -
Roger Lionel,
Smith Gregory,
Morrissey Oliver
Publication year - 2019
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12236
Subject(s) - exchange rate pass through , exchange rate , economics , inflation (cosmology) , shock (circulatory) , monetary economics , vector autoregression , value (mathematics) , monetary policy , food prices , sign (mathematics) , econometrics , macroeconomics , food security , biology , mathematics , medicine , ecology , mathematical analysis , statistics , physics , theoretical physics , agriculture
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.