Relations Of Inflation With Macro Economic Variables

Interrelations Among Inflation and other Macroeconomic Variables in the Gambia Economic Management and Planning Unit, MOFEA, The Gambia

•

Inflation and Other Variable

1

Contents of Presentation 1. 2. 3. 4. 5. 6.

Purpose and Data Base Methodology Annual Trends Monthly Trends Major Conclusions Policy Briefs

Inflation and Other Variable

2

1.1 Purpose • To examine the interrelations among inflation and the major monetary, fiscal and real variables for the Gambian economy. • Inflation is measured by the rate of change of the Consumer Price Index (CPI) and that of the GDP deflator (GDPDF). • Other macro variables- GDP, M2, EXP, REV, TBOUT, Budget Deficit, Bank Credits, Deposit rates, TB Yield, Exchange rate Inflation and Other Variable

3

1.2 Data Base • Two sets of data are considered for our econometric analysis: • (1) Annual Time series data for 12 years from 1998 to 2009. • (2) Monthly Time Series data for 33 months from January 2007 to September 2009. • However, GDP figures are not available for the monthly series.

Inflation and Other Variable

4

2.1 Methodology • For both annual and monthly time series data, linear and log-linear regression equations are fitted with the help of OLS method. • For both linear and log-linear equations, two sets of regression equations are fitted. • In one set, CPI is regressed on other variables. • In the other set, the inflation rate is regressed on discount rate, deposit rate, yields, depreciation and growth rates of M2, TB, REV, EXP. • Data sets and regression results are presented in the Annex Tables 1 to 22 in the paper.

Inflation and Other Variable

5

2.2 Overview of Results • Both the linear and log-linear regression equations indicate almost similar results for the annual time series data. • They also show similar results for the monthly time series data. • But, there are some differences of results between the annual and monthly series data.

Inflation and Other Variable

6

3.1 Annual Time Series (Indices: Base 1998=100)

Year 1998 Inflation and Other Variable

7

3.2 Annual Time Series Data

900 Inflation and Other Variable

8

3.3 Correlation Matrix for Annual Data

Inflation and Other Variable

9

3.4 Annual Growth Rates (%)

Year 1999 Inflation and Other Variable

10

3.5 Trends of Growth Rates (%)

Inflation and Other Variable

11

3.6 Correlation Matrix for Growth Rates

Inflation and Other Variable

12

4.1 Indices of Monthly Trends (Base January 2007 = 100)

Inflation and Other Variable

13

4.2 Correlation Matrix for Monthly Data

Inflation and Other Variable

14

4.3 Descriptive Statistics for Monthly Trends

Variab Gambia Inflation Macroeconomic and Other Variable Forecast

15

4.4 Correlation Matrix for Monthly Data

I Gambia Inflation Macroeconomic and Other Variable Forecast

16

5.1 General Conclusions-1 • Absolute level of Consumer Price Index (CPI) is positively and significantly correlated with money supply. • But, the inflation rate (i.e. the annual rate of change of CPI) has no significant relations with the growth rate of money supply. • Inflation rate has significant positive correlations with CBG policy rate, TB yields, rate of depreciation of Dalasi in terms of US dollar and the growth rate of government revenues. Inflation and Other Variable

17

5.2 General Conclusions-2 • Inflation rate has no significant relations with the deposit rates, government deficits as percentage of GDP, and the growth rates of government expenditure, government borrowing from the markets and the total treasury bills outstanding. • Therefore, the study does not support the general view that the money supply, government deficits, government borrowing and total domestic debt outstanding affect inflation rate. Inflation and Other Variable

18

6.1 Policy Briefs • Econometric relations indicate that the CPI inflation, overall GDP inflation, treasury bills yields, and the deposit rates are unduly affected by the high discount rate announced by the Monetary Policy Committee (CPC). • We need to adopt more scientific methodology for determination of the Central Bank rediscount rate (i.e. the policy rate). Inflation and Other Variable

19

6.2 Suggested Methodology • Expected annual inflation rate = 5 percent • Average nominal deposit rate = Inflation Rate + Real rate of 2% = 7 percent • Reasonable transactions costs of banks = 3 percent of assets or liabilities • Normal profit rate = 2% of assets or liabilities • Average annual cost of collection of funds by banks = 7% + 3% + 2% = 12 percent • Reasonable yield for no-risk treasury bills with maturity of one year or more = 12 percent • CBG Rediscount (Policy) Rate = 12 percent + CBG transactions cost of 2 percent = 14%. Inflation and Other Variable

20

Thank you Have a Good Day

Inflation and Other Variable

21