A Small Scale Macroeconomic Model for Monetary Policy Implementation in Zambia

By Peter Zgambo
2011
A small scale macroeconomic model for Zambia is developed in this paper. The model consistent of four behavioural equations and a policy rule. The estimated results of the model indicate that consumer price inflation in Zambia is mainly influenced by demand pressures and money supply in the long-run while output was found to be empirically determined by the real exchange rate and copper prices in the long-run. With regard to money supply, the monetary base was the major determinant in the long-run whilst the long-run determinants of the exchange rate were found to be the interest rate differentials and the price of copper. The model generally exhibits plausible dynamic properties when subjected to a shock. In this regard, an exchange rate shock to the model produces the responses to key variables that suggest the importance of the exchange rate in the transmission mechanism of monetary policy in Zambia.