Inter-country trade dependence and inflation transmission mechanisms: the case of a small open African economy

Joao Jalles

Research output: Contribution to journalArticle

Abstract

Purpose – According to the Central Bank of Cape Verde, price stability is an important aspect when conducting its monetary policy. Given the fixed exchange rate regime towards the Portuguese Escudo/Euro and the high degree of trade inter-dependence, this paper aims to analyse the “inflation import” phenomenon from Portugal to Cape Verde's economy from 1992 to 2008.

Design/methodology/approach – The paper takes a VECM and Granger causality approach.

Findings – The paper finds evidence in favour of the existence of a propagation mechanism, i.e., inflation transmission from Portugal to Cape Verde. The reverse conclusion is not true though. Another interesting implication from the policy-making perspective is that Cape Verde's CPI is affected by non-expected shocks in the short run and it takes, on average, 12 months for an adjustment towards a higher level to take place.

Practical implications – So, Portuguese inflation is an important variable to take into account when doing inflation forecasting exercises to Cape Verde's economy as well as when thinking about setting/defining exchange rate regimes. In this context, diversifying trading partners in Cape Verde is highly recommended as a way to reduce and dilute the Portuguese influence (as well as the role of external shocks) in the overall economy and price levels in Cape Verde.

Originality/value – The paper applies a well-known economic phenomenon to the relationship between Portugal and one of its former colonies – Cape Verde. The analysis is of use to policy practioneers and to the country's Central Bank.
Original languageEnglish
Pages (from-to)198-213
Number of pages17
JournalInternational Journal of Development Issues
Volume9
Issue number3
DOIs
Publication statusPublished - 2010

Fingerprint

Cape Verde
inflation
central bank
economy
exchange rate
Portugal
monetary policy
policy making
import
price level
methodology
Transmission mechanism
Africa
Inflation
Euro
causality
economics
interdependence
Exchange rate regimes
Central bank

Cite this

Inter-country trade dependence and inflation transmission mechanisms : the case of a small open African economy. / Jalles, Joao.

In: International Journal of Development Issues, Vol. 9, No. 3, 2010, p. 198-213.

Research output: Contribution to journalArticle

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