Exploring Sub-Saharan Africa's money supply-inflation nexus: A GARCH-MIDAS approach

Abstract

The intricate relationship between money supply and inflation has been a focal point of economic research for decades, with extensive literature exploring the dynamics of this nexus across various regions and economies by either transforming monthly data to quarterly and/or quarterly to monthly, which could lead to bias outcome, as the data generating process is mostly truncated. However, despite the substantial body of work, the empirical understanding of the money supply-inflation nexus in Sub-Saharan Africa remains relatively underexplored. In this context, our paper aims to contribute to the existing literature by employing a novel and advanced econometric technique – the GARCH-MIDAS (Mixed Data Sampling) model. The motivation for adopting the GARCH-MIDAS model in our analysis lies in its ability to address critical limitations associated with conventional methodologies, which include the violation of the data generating process of money supply and inflation. We find that fluctuations in money growth drive a higher inflation risk across the selected Sub-Saharan African countries. Our results suggest that, indeed, money supply matters in determining inflation, as it appears to contain ample information to improve the predictability of inflation. We, therefore, recommend the need for the monetary authority to carefully monitor banking system liquidity as an effective tool for taming inflation in their respective countries.

Keywords

• E31
• E51
• O55