Abstract
GDP growth, money growth, exchange rate and inflation play critical role in the macroeconomic stability of an economy and have a direct effect on policy making process. This paper examines the relationship between exchange rate, GDP growth, money growth and inflation in Sierra Leone from 1980 to 2013 using descriptive statistics and regression methods for the data obtained from the world development indicators (WDI) data base. Inflation was the dependent variable while its potential macro elements were explanatory variables. The correlation result revealed that, there is an absence of multicollinearity among the variables in the model. The result of the long-run co-integrating relationship in the model shows that GDP growth has significant negative effect on inflation in Sierra Leone whereas exchange rate, foreign price level and money supply growth have a positive effect. Given the implication of these macroeconomic indicators, it is imperative on government to ensure that the liquidity specifications be broaden in order to incorporate foreign currency deposits held at commercial banks so as to establish efficient control over money supply. This study would be of great value to policy makers in facilitating macroeconomic stability.
Highlights
IntroductionThese indicators are closely connected to the external sector andprovide critical information with regards the stability of an economy
Increase in price level/inflation causes the demand of money to increase, which in turn causes the interest rate and the higher interest rate causes intensification (Case and Fair, 1992).On the other hand, a reduction in consumption brought by an increase in interest rate enhances a decrease in output (Case and Fair, 1992).Sierra Leone is a British colonized country which gained independent in April; 1961and shared boundary with Guinea to the north and extended to northeast and Liberia in the southeast and to the west of the Atlantic Ocean
This implies that a 1% increase in foreign price level can lead to approximately 0.66% increase in the rate of inflation in Sierra Leone
Summary
These indicators are closely connected to the external sector andprovide critical information with regards the stability of an economy. Like many Sub-Saharan countries, Sierra Leone is part of the Least Developed Countries (LDC), and participates in Heavily Poor Countries (HIC) initiatives .The country, once an exporter of cocoa, coffee, piassava and diamond is one of the least developed countries in the world During this period, it annual economy growth was high as compared to many developed countries by standards. Sierra Leone, like many other countries launched the Structural Adjustment Program (SAP) and the floating exchange rate in 1986.These were aimed to increase the competitiveness of the country’s export, as well as retaining a fixed exchange rate and nominal volatility to ensure a smooth, competitive and efficient financial sector to stimulate the development of the economy
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