Long and short run effects of inflation on output in Zambia:1964-2015

Abstract

The inflation-output nexus is one of the most important macroeconomic relationships that has attracted considerable research interest for many years. For most developing countries, monetary authorities strive to achieve price stability. This is done in order to avoid the costs and uncertainties associated with inflation. In addition, achieving a sustainable path of output growth is a key objective of most developing countries. This study adopts a bivariate vector error correction (VEC) model composed of output and inflation in order to test the effect of the latter on the former in Zambia over the period 1964-2015. The study also conducts Granger causality test to evaluate the direction of the causal relationship between inflation and output in Zambia. Empirical results show that there is a cointegrating relationship between inflation and output in Zambia. Elasticity estimate show that for a 1% increase in inflation, the average value of output growth decreases by 5.4%.The results further indicate a unidirectional causality running from inflation to output. Therefore, authorities should aim at controlling inflation in order to safeguard output and growth. This calls for fiscal and monetary policy coordination in order to safeguard output whilst ensuring price stability in the economy. ______________________________________________________________________________ Keywords: Inflation, Output Growth, VAR/VEC, Cointegration, Granger Causality JEL Classification: E31, O11, O42, O55