Exchange rate policy and price determination in Botswana

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

Working Papers from African Economic Research Consortium

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.

Date: 1999-03
Note: African Economic Research Consortium
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