Adoption of Inflation Targeting in Sierra Leone: An Empirical Discourse

Abstract

The main research question of this paper is to assess Sierra Leone's preparedness for adopting a fully-fledged or lite Inflation Targeting (IT) framework amid macroeconomic and structural bottlenecks experienced in the domestic economy. Several theoretical and empirical perspectives were reviewed to bring out cogent insights on the subject matter. With the use of the Unrestricted Vector Autoregression (VAR) model, relevant macroeconomic variables ranging from 2010Q2 to 2019Q4 were utilised to assess plausible outcomes, aided with some iterative shock impulses, variance decomposition, and historical decomposition, to explain the reaction of inflation to specific factors in Sierra Leone. The study outcome suggests that Sierra Leone as a supply-driven economy is inducing a high level of inflation on account of the pass-through effect of high prices to consumers in the domestic economy. This to a greater extent is undermining monetary policy management, which gives credence to the fact that authorities at the Bank of Sierra Leone should not switch to inflation targeting in the short and medium-term on the basis that monetary policy actions could instigate further price increases of goods and services, underpinned by weak real sector operations and a somewhat dollarized domestic market. At best, there is a need for BSL to continue its current policy methodology, while working in ensuring monetary policy actions are transparent and well communicated at all times to getting inflation to a single-digit.