Inflation dynamics in Sub-Sahara African countries: An error correction approach

This thesis explores the dynamics of inflation in Sub-Sahara African countries of Nigeria, Ghana, and Sierra-Leone. The study specifically investigates the dynamic interrelationships among prices, money, exchange rates, and terms of trade, as well as the roles of each variable in the determination of inflation in these countries. The period of investigation covers 1960 through 1995, using annual series. The study departs by reviewing the theories of inflation and based on the propositions inherent in the theories, classifies them as monetarists or structuralists\u27 schools of thought. Subsequently, the study explores the previous empirical studies on inflation in developing countries, followed by a descriptive profile of each country under study. The major innovations of this thesis include the ability to derive a simple reduced-form equation within the frameworks of both monetarists and structural models. Second, the application of error correction model provides an extension and improvement of earlier studies in understanding the dynamics of inflation in Africa. So far, very few studies have employed this recent, yet superior econometrics tool in these countries. The error correction estimates suggest that when disequilibrium arises in these economies, exchange rates adjustments restore the economies to a long run equilibrium level more than other variables. The process is common and unique to all countries under study. Monetary factors also explain to some large extent the inflationary process in these countries. The monetary shock especially matters most when it explains itself and the price levels. Investigation rules out any direct causal link between the terms of trade and other variables. Addressing the inflationary problems in these countries requires an effective monetary policy that will focus on effective management of exchange rates and the curbing of excessive money supply growth. The exchange rate regimes\u27 policy objective should be to set up a variable target range of devaluation