Analyzing Determinants of Inflation When there Are Data Limitation:The Case of Sierra Leone

Abstract

This paper examines the determinants of inflation in Sierra Leone using a structural vector autoregression (VAR) approach to help forecast inflation for operational purposes. Despite data limitations, the paper accurately models inflation in Sierra Leone. As economic theory predicts, domestic inflation is found to increase with higher oil prices, higher money supply, and nominal exchange rate depreciation. The paper then employs a historical decomposition approach to pinpoint the sources of a marked decline in inflation in 2006 and assesses its forecasting properties. Overall, the model serves as a useful addition to the toolkit for analyzing and forecasting inflation in countries with limited data availability.Data analysis;Economic forecasting;Oil prices;Exchange rate depreciation;Forecasting models;inflation, monetary policy, central bank, money supply, aggregate demand, price level, monetary fund, forecasting inflation, inflation rate, annual inflation, foreign exchange, open market operations, money growth, inflation dynamics, expansionary monetary policy, price inflation, increase in inflation, annual inflation rate, inflation response, monetary zone, high inflation, money balance, monetary economics, reduction in inflation, discretionary monetary policy, monetary transmission, money demand, actual inflation, real variables, monetary policy reaction function, monetary transmission mechanism, rational expectations, wage-price, monetary restraint, monetary policy transmission mechanism, monetarism, monetary policy transmission mechanisms, discount rates, monetary target, monetary statistics, adaptive expectations hypothesis, monetary policy objectives, government securities, adaptive expectations, price stability, monetary reaction function, nominal interest rates, terms of trade, effect of money growth, monetary policy operations, inflation targeting, intermediate monetary target, persistent high inflation