The Determinants of Inflation in Sierra Leone: A Cointegration Analysis

Abstract

The Sierra Leone economy has been plagued over the years with inflationary trends, monetary instability and economic vulnerability largely due to persistent resources mismanagement, pre and post war corruption, weak coordination in policies (monetary and fiscal) and the disruption of economic activities caused by social disorder. This study is therefore aimed at investigating the determinants of inflation in Sierra Leone between the period 1990 and 2013 despite immense data limitation. The Augmented Dickey-Fuller test result showed that the variables were integrated in the same order. The Johansen Cointegration result suggested that there are at most four cointegrating vectors among the estimated variables. The estimated coefficient of the ECM revealed that the speed of adjustment for errors in the long run is 74.82 percent and that in the short run, the explanatory variables money supply and GDP significantly and positively contributed to the inflation rate in Sierra Leone while interest rate is having a negative but significant relationship. There is no significant relationship among exchange rate; import of goods and services to that of inflation rate in the short run. The explanatory variables accounted for 75.40 percent of the variations in inflation during the period of study with the error term accounting for the remaining 24.6 percent. All the independent variables have significant effect on inflation in the long run with money supply and GDP contributing positively while exchange rate; interest rate and import contribute negatively. Money supply should be controlled in the short run and better channeled in the long run.

Keywords: Cointegration, Exchange Rate, Gross Domestic Production, Inflation; Interest Rate; Money Supply.