Copper prices and financial markets in Zambia

Abstract

Resource-dependent economies in Sub-Saharan Africa are vulnerable to external shocks in the international commodity markets. In this paper, we investigate the financial markets channel through which these shocks are transmitted to the Zambian economy. Using a Vector Error Correction Model (VECM), we show that copper prices and financial market variables share a long-run equilibrium relationship. Short-term interest rates are shown to be the major channel through which shocks in the copper market are transmitted to the economy, bearing the burden of correcting the system to equilibrium. We provide policy recommendations to manage the vulnerability of financial markets (and macroeconomy) to short and long-run shocks to the international copper prices.

Keywords: Zambia; VECM; Cointegration; Granger causality; Copper prices; Financial markets