Determinants of Inflation in Liberia: An Econometric Analysis Using ARDL Bounds Testing Approach

Abstract

The rate of inflation in Liberia has increased significantly over the last two decades and, since the ascendency of the new government headed by President George Manneh Weah, it has become more pronounced. The steep rise in inflation is increasingly eroding the purchasing power of consumers, thus leading to welfare decline especially for low income earners. The overarching objective of this study is to assess the determinants of inflation in Liberia. To achieve this objective, this study employs Bounds Testing Approach and Autoregressive Distributed Lag (ARDL) techniques using monthly time series data spanning the period 2014 to 2018. The empirical findings of this study reveal that, the current rate of inflation in Liberia is largely influenced by the unauthorized printing and infusion of new banknotes into the economy by the Central Bank of Liberia. In addendum, the results show that Customs taxes, foreign exchange rate depreciation arising from balance of payment deficits, international oil price, and import are key determinants of inflation in Liberia. Consistent with the results, this study recommends the demonetization of the current Liberian dollars banknotes (both old and new). This will provide the central bank with reliable data regarding the total quantity of Liberian dollars in circulation, thereby enabling the bank to promulgate salient contractionary monetary policies that would drive the current rate of inflation to single digit. Additionally, this study recommends that the government of Liberia embark upon diversification policies with greater emphasis placed on value addition in manufacturing and agricultural production for domestic consumption.

JEL Classification Codes: E31; E58.

Keywords: Liberia, Inflation, ARDL, Central Bank of Liberia

DOI: 10.7176/JESD/11-6-04

Publication date:March 31^st 2020