Inflation Dynamics in Zambia: Evidence from a Time Varying Parameter Model

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Abstract

This study investigates Zambia’s inflation dynamics through a time-varying parameter error-correction model. The results reveal that liberalization, monetary policy reform, and credibility gains progressively reshaped the transmission channels of inflation, though external volatility remained a persistent source of vulnerability. In the early 1990s, inflation was driven by unstable expectations, rapid exchange rate pass-through, and foreign price shocks, while money and output shocks were largely inert. Under monetary targeting, money growth became the dominant driver, expectations were more anchored though still volatile, and output shocks began to exert moderate influence. Exchange rate and foreign inflation shocks, initially strong, gradually moderated as reforms deepened. In the interest rate–based regime, expectations became firmly anchored, the money–inflation nexus weakened, and output shocks assumed a stabilizing role, curbing inflationary pressures. Yet exchange rate shocks re-emerged as the dominant channel, with episodes such as the 2015 depreciation and COVID-19 disruptions reigniting strong pass-through. Across regimes, inflation remained weakly mean reverting, underscoring limited self-correction and persistent vulnerability. The policy lesson is clear: reforms reshape inflation dynamics but cannot insulate economies from external volatility. Sustained credibility, disciplined policy signaling, structural diversification, and adaptive frameworks remain indispensable for resilience and durable price stability.