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Exchange rate policy and price determination in Botswana

Author

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  • Ata, Jacob K.
  • Jeferis Keith R.
  • Manathoko Ita
  • Siwawa-Ndai, Pelani

Abstract

ThedominantinfluenceofSouthAfricangodsontheBotswanaCPIbasketleadstothe expectationthatSouthAfricanpriceshaveasignificantroleindeterminingpricesin Botswana.ThispaperexaminesBotswana'spriceandinflationrelationshipsandtheir interaction.Cointegrationanalysisisusedtodevelopadynamicerorcorectionmodel that establishes the link between long-run equilibrium prices and short-run inflation. Results show that the exchange rate(andSouthAfricanprices), rather than money, are cointegrated with prices, supporting theoretical predictions of a dominant long-run equilibrium relationship between prices and the exchange rate in a pegged exchange rate regime with capital controls. In the short run, both domestic prices and imported inflationary pressures determine growth in the price level each month. This suggests that monetary, exchange rate and fiscal policy can be used to temper inflation in the short run. Changes in the exchange rate and prices will only have short-term price competitiveness effects, however. Overtimeadjustmentbacktotheequilibriumreal exchange rate occurs.

Suggested Citation

  • Ata, Jacob K. & Jeferis Keith R. & Manathoko Ita & Siwawa-Ndai, Pelani, 1999. "Exchange rate policy and price determination in Botswana," Working Papers 89996df5-83d9-472c-8bc0-b, African Economic Research Consortium.
    • Handle: RePEc:aer:wpaper:89996df5-83d9-472c-8bc0-bfbad24647fc
    Note: African Economic Research Consortium
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