Determinants of Inflation in the Democratic Republic of Congo: An Application of ARDL Modelling

Abstract

The objective of this study is to estimate the short- and long-term determinants of inflation in the DRC for the period from 1981 to 2017. To achieve our objective, we used cointegration techniques based on Autoregressive Staggered Lag (ARDL) modelling. The estimated model is derived from Irving Fisher's quantitative equation of money, into which we have incorporated other variables such as the exchange rate, the budget deficit, gross domestic product, the demographic dependency ratio, public spending and household final consumption expenditure. The results show that, in the short and long term, inflation in the DRC is positively influenced by the nominal exchange rate and demographic dependency, unlike money supply, final household consumption expenditure and the budget deficit, whose effects are only significant in the long term. As for gross domestic product and public spending, estimates have shown that inflation reacts negatively to their shocks. In addition, the nominal exchange rate remains the most important determinant due to its short and long term elasticities (0.86 and 0.89) followed by the demographic dependency ratio (0.43% and 0.46%) and finally the budget deficit with a long term elasticity of 0.59%.