The Determinants of Inflation in Botswana and Bank of Botswana’s Medium-Term Objective Range

Abstract

This study is motivated by the high and unstable episodes of inflation in Botswana over the last 20 years or so. This is despite the Bank of Botswana’s (BOB) concerted effort to keep inflation at its minimum and stable over time. More specifically, it has been attempting to bring down and keep inflation within the medium-term objective range of 3 to 6percent. The objectives of this study are, therefore, to: (a) examine the determinants of inflation in Botswana by identifying the factors that have influenced its movements over time; and (b) assess the likelihood that the Bank of Botswana’s medium-term objective range of 3 to 6 percent could be achieved in the short to medium-term (one and half to two years). To examine these objectives, the study used an Auto Regressive Distributed Lag (ARDL) estimation technique. A quarterly data ranging from the first quarter of 1990 to the fourth quarter of 2010 is used to estimate the model. And the results show that the identified variables are significant and have the theoretically expected signs. The main conclusions of the study are: (a) price inertia, real GDP, money supply and South African prices play a dominant role in determining inflation in Botswana; and (b) unless international deflationary environment prevails, the probability that the Bank of Botswana will achieve its medium-term objective range of 3 to 6 percent in the medium-term is very low, according to the policy simulation results in this study.

Keywords: Inflation, Monetary Policy, forecasting, Simulation and Validation

BOJE: Botswana Journal of Economics, 11(15(), 57-74