A Structural Analysis of the Determinants of Inflation in the CEMAC Region

The author analyses inflation in the Central African Economic and Monetary Community. First, a semi-structural VAR is used to identify the sources of inflation empirically; the chapter finds that fiscal shocks and the commodity price shocks that generally drive them have been important sources of inflation volatility, with monetary policy passively accommodating. A DSGE model is then developed and calibrated to replicate the empirical findings and to study the implications of a more active monetary policy. This active policy would involve greater (sterilized) reserve accumulation, which under the plausible assumption of limited capital mobility can help contain equilibrium appreciation pressures and therefore inflation, but at the cost of crowding out the private sector. Attempting to use monetary policy to contain inflation under a fixed exchange rate has important drawbacks, which highlights the need to rely on fiscal policy for macro and price stability in these countries.