Intra- and inter-continental transmission of inflation in Africa

Abstract

In this paper, the transmission pattern of inflation in Africa is investigated in several contexts. Specifically, the results of the decomposition of variance are analysed, which are obtained by estimating an error correction model comprising 11 countries: seven major African countries and four industrialized countries, i.e., the USA, UK, France, and Japan. The major empirical findings are as follows. First, a surprisingly large fraction of domestic inflation in Africa is attributable to inflation shocks originating in foreign countries. Second, the USA is found to be the leading producer of inter-continental inflation in Africa. Third, although the Ivory Coast does seem to be the marginal leader, geographical proximity does not seem to play a significant role in intra-continental inflation transmission. Fourth, Friedman (Essays in Positive Economics, University of Chicago, 1953)'s argument for the flexible exchange regime is found to be marginally valid for Sub-Saharan African countries: African countries adopting the independently floating exchange rate system tend to be less influenced by foreign inflation innovations.