The inflation process in Tanzania

Transcription

1 The inflation process in Tanzania Steve O Connell, Swarthmore College and IGC Christopher Adam, Oxford and IGC David Kwimbere, BOT Wilfred Mbowe, BOT IGC Growth Week, September 22, 2010

2 outline [1] Motivation economic structure targets and outcomes food and non-food prices [2] A parsimonious approach monetary equilibrium relative PPP agricultural supply shocks [3] Preliminary evidence headline inflation food and non-food [4] Research directions slide 1

3 Share of food in total consumption TZA GDP per capita at constant 2001 international prices Source: USDA Economic Research Service slide 2

4 Correlation between real GDP and inflation TZA Real GDP per capita, PPP HP-filtered variables. All countries with 17 or more yrs of data starting in Source: Adam et al. (2010). slide 3

5 slide 4

6 Inflation in revised CPI and components 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 time Headline Food Non-food Source: NBS. Revised CPI from 2001m12 slide 5

7 Headline and non-food inflation 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 time Headline Transport + Fuel,Power,Water Core Source: NBS. Revised CPI from 2001m12 slide 6

8 recent work Tanzania Mwase IMF WP 2006 on exchange-rate pass-through. Delgado et al. IFPRI 2004 on pass-through to food staples Mbowe BOT 2008 on determinants of inflation an exchange rate puzzle. Adam, Kessy, Nyella, O Connell IGC WP 2010 on money demand. VECM evidence that monetary disequilibrium affects inflation SSA Barnichon & Peiris 2008 JAE on money and output gaps. Thornton, SAJE 2008 on money, output and inflation... both corroborate monetary disequilibrium as important Food prices and inflation Loening, Durevall and Birru (2009) slide 7

9 [2] a parsimonious approach Loening, Durevall and Birru (2009) Inflation dynamics and food prices in an agricultural economy: the case of Ethiopia The World Bank, Policy Research Working Paper Series No Theory suggests long-run relationships Monetary equilibrium The equilibrium real exchange rate AS/AD equilibrium at natural GDP But these LR relationships may not be simple (Mv/Py=stationary, P/EP*=stationary, Ynat=slow-moving). We know very little about short-run dynamics, but don t have enough data to take a systems approach slide 8

10 Monetary disequilibrium 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 M/p EC term M/Py deviation from trend slide 9

11 E*Ptza/Pworld by sector 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 Food (GEM) Energy (GEM) Core (USWPI) Source: NBS, World Bank Global Economic Monitor, and IMF. Black = REER (BOT) slide 10

12 Growth rates of sectoral real GDP Agriculture Industry and Services GDP Source: NBS. slide 12 11

13 Agricultural supply gap and food inflation 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 Agri Gap Food inflation (y/y) Source: NBS (Gap = HP cycle in a quadratic monthly interpolation, matching means) slide 12

14 [3] Reduced models for headline inflation Variable depvar depvar Δlog CPI t-stat Δlog CPI t-stat depvar (t-2) depvar (t-4) ec_m2 (t-3) AGRI gap (t-1) log(rer) gap (t-2) Δlog M2 (t-1) Δlog M2 (t-2) Δlog M2 (t-3) Δlog E (t-1) Δlog E (t-2) Δlog E (t-3) Δlog E (t-4) N r rmse slide 13

15 [3] Reduced models for food and non-food Variable depvar depvar Δlog CPIF Δlog CPIN depvar (t-2) depvar (t-3) ec_m2 (t-3) AGRI gap (t-1) AGRI gap (t-2) log(rer) gap (t-1)* log(rer) gap (t-2)* Δlog M2 (t-1) Δlog M2 (t-2) Δlog M2 (t-3) Δlog E (t-1) Δlog E (t-4) N r rmse *Overall RER in food regression; nonfood RER in non-food. slide 14

16 [3] summarizing Money growth matters both in the long run and in the short run. Agricultural supply shocks transmit strongly to food prices and overall inflation; less so to non-food but no clear evidence of adverse intersectoral impact on non-food demand Inflation inertia is considerably stronger on the food side. A long-run equilibrium real exchange rate relationship *may* help drive inflation but relative PPP fails. The depreciation puzzle is less apparent, and there is some evidence of a conventional long-run pass-through. The short-run impact is zero for headline and food, and negative for non-food. slide 15

17 [4] research directions Improve these specifications esp the long-run elements. Need much better measure of agricultural supply shocks Quarterly or monthly equilibrium real exchange rate model Monthly money demand model Fuel price shocks Look at commodity-level prices to understand open-economy impacts and work with NBS to resolve a price-level puzzle Develop low-order 2-sector DSGE models to deal with simultaneity and inter-sectoral transmission of shocks slide 16

18 Average inflation (commodity/region observations) m m12 Commodities Headline CPI Source: NBS, non-interpolated data. slide 17

19 EPtza/Pworld using commodity-based indexes 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 Grains Food Fuel Source: NBS and World Bank Global Economic Monitor. slide 18

20 Thank you!