The dynamics of the inflation process in Mozambique: 1990/ 1996

Abstract

This dissertation the dynamics of inflation in mozambique using secundary data for the period 1990-1996. The choice of the period is based purely on the avaliability of data wich have to be on monthly basis to provide a relatively sufficient degree of freedom. Relevant statistics were collected from central bank and statistic institute of Mozambique's publications, and Internation Monetary fund's International Financial Statistics Database. In this study, we tried to answer the questions of whether exchange rate cause domestic inflation in Mozambique. To put the answer in the right perspective we first reviewed a therelevant theoretical and empirical literature on the issue, and later we derrived a theoretical model of inflation determination and estimated a dynamic Error Correction Model. This takes the form of an Autoregressive Distributed Lag-Error Correction Mechanism and represents an equation that specifies the relashionship of the long-run behavoir of Mozambique prices to its short-run volues. Ther major conclusion from the theoretical and enpirical review is that inflamation in mozambique has heenconsstents high ar an averaze annimal rate of 51.2 percent for the period 19990-95 inflation below 20 percent in 19996. The jactors wich have contributed to the 1990-95 inflation can be described as axcessive demand pressure fuelled by monetary growth attendant upon fiscal deficit financing and the correction of prices wich include exchange rate adjustment together with the freeing of many products prices and adjustment of fixed prices. Our major empirical following the estimation of our inflation equation are as follows: while the link between inflation and the rate of growth of money supply exceeding money demand professed by the monetarist theory of inflation is not refuted by this study. We found that factors other than monetary factors have played an important role im determining the curse of inflation in the short-run in Mozambique. These include exchange rate devolutions, real GDP growth and imported inflation. A particulary interesting feature of our dynamic error-correction model is the strong impact and speed of adjustment process equilibrium value. As for policy implication, a major conclusion is that in would be serionsly misleading to rely only an monetary policy as a way of containing the Mozambique inflationary process. The results~have demostrated the important role that foreign factors play in causing domestic inflation, such that a faiture to consider these factors play in causing domestic inflation, such that a failure to consider thease factors, in designing of many policy may frustrate the attainment of the policy objectives.