Togo: Selected Issues
Author:
International Monetary Fund. African Dept.
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Publication Date:
13 Nov 2015
eISBN:
9781513562797
Language:
English
Keywords:
ISCR; CR; food inflation; Togo; GDP; inflation expectation; CPI volatility; inflation in Togo; inflation in the WAEMU country; monetary policy decision; Consumer price indexes
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Togo: Selected Issues

Abstract

Togo: Selected Issues

What Explains Inflation Dynamics in Togo? the Importance of Food Prices1

A. Background

Inflation has been particularly low in Togo and the WAEMU in the last 12 months, while WAEMU countries experienced high growth rates and accommodative monetary policies. This apparent inconsistency between high growth rates, expansionary monetary policies, and low inflation can be largely explained by the behavior of food prices in the sub-region.2 Given the large and persistent effects of food inflation on overall inflation in Togo, policymakers should avoid basing their analysis on measures of only core inflation.

Food inflation has been mostly negative since the second half of 2013 in Togo and the WAEMU. Figure 1 shows that regardless of the acceleration of growth in the WAEMU, inflation was low or negative. Figure 2 presents the increasingly accommodative monetary policy set by the BCEAO in recent years.

Figure 1.
Figure 1.

GDP growth and Inflation in the WAEMU countries

Citation: IMF Staff Country Reports 2015, 310; 10.5089/9781513562797.002.A002

Figure 2.
Figure 2.

Monetary Policy in the WAEMU

(Interest rates, in percent)

Citation: IMF Staff Country Reports 2015, 310; 10.5089/9781513562797.002.A002

Food inflation in Togo has been the main driver of total consumer price variations contributing negatively to overall inflation between April 2013 and November 2014 (Figure 3). Average food inflation was -4.4 percent in 2014 contributing to -1.2 percent to average overall inflation, which was 0.2 percent at end-2014. Food inflation has been picking up since December 2014, bringing total overall annual average inflation to 1 percent in July 2015.

Figure 3.
Figure 3.

Togo: Consumer Price Index

(Contributions to year-on-year change by components, in percent)

Citation: IMF Staff Country Reports 2015, 310; 10.5089/9781513562797.002.A002

Negative food inflation in Togo and other WAEMU countries coincides with global food prices dynamics. Indeed, food prices in Togo correlate well with swings in international food prices (Figure 4). In addition, food inflation has driven CPI volatility (Table 1).

Figure 4.
Figure 4.

Togo: Total and Sub-Components of Inflation

Citation: IMF Staff Country Reports 2015, 310; 10.5089/9781513562797.002.A002

Table 1.

Togo: Mean and Volatility of Total and Sub-Components of Inflation

article image

B. Analytical Framework

Recent literature has argued that, in the case of low income countries, special attention should be given to food prices to analyze inflation dynamics. Notably, Walsh (2011) and Anand et al. (2015) argue that in the case of low income countries, it is particularly important that monetary authorities do not exclude food items when defining their policy objectives given that food inflation is often more volatile, has a larger weight in the Consumer Prices Index (CPI), and is more persistent than in emerging and advanced economies.

Food inflation affects overall inflation directly (which is measured by its weight in the CPI basket) and indirectly which can be identified as the pass-through from changes in food prices to changes in other sub-components of inflation (Rangasamy, 2011).

C. Econometric Evidence in the Case of Togo

Persistence of headline, food and core inflation

Recently, Walsh (2011) and Thamae and Letsoela (2014) have argued that for the purposes of monetary policy, central banks should analyze headline inflation and its sub-components taking into account their persistence and their level of pass-through to different sectors of the economy, and not only their relative volatility. The persistence of inflation sub-components is important because it has an impact on the duration of a shock to a specific component, e.g. to food prices, for overall inflation.

Table 2 presents persistence coefficients estimates for different components of inflation in Togo.3 Consistent with the literature, food inflation in Togo is more persistent than headline inflation, with a first-order autoregressive coefficient of 0.88 in the case of food prices versus a 0.86 for overall inflation. Measures of core inflation present lower persistence.

Table 2.

Persistence estimates for Total Inflation and Sub-Components in Togo

article image

denotes significance at the 1 percent level.

Transmission of shocks from food inflation to core inflation

As mentioned before, for the purposes of informing policy decisions, it is also relevant to quantify how much shocks to food prices are transmitted to other prices in the economy. In this context Walsh (2011) and Thamae and Letsoela (2014) estimate a vector autoregressive model (VAR) including food inflation and a measure of core inflation. Using monthly data for Togo for the period 1997-2015, the following VAR is estimated:

π t F = β F F π t − 1 F + β N F π t − 1 N + ϵ t F ( 1 )
π t N = β F N π t − 1 F + β N N π t − 1 N + ϵ t F ( 2 )

where πtF corresponds to food inflation, πtN refers to non-food inflation, and εt is an error term.

Using the regression estimates it is possible to quantify the extent of the transmission of shocks between different sub-components of inflation. Figure 4 shows that a one standard deviation shock to food inflation (about 4 percent change in food inflation) translates into a 0.5 change in non-food inflation after 10 months.

Figure 5.
Figure 5.

Transmission of shocks from food inflation to core inflation

Citation: IMF Staff Country Reports 2015, 310; 10.5089/9781513562797.002.A002

Note: The following Choleski ordering is employed (from most exogenous to most endogenous):

D. Policy Implications

Food inflation has large and persistent effects that feed into overall inflation in Togo. Policymakers should bear in mind that shocks to food prices can translate into inflationary dynamics in other sub-components of inflation and affect the overall level of inflation. In this context, at the national level, policies affecting food prices such as export permits, subsidies of fertilizers, and control of food prices, need to bear in mind the implications for overall inflation. At the regional level, monetary authorities should take into account the evolution of food prices for their monetary policy decisions and not only core measures of inflation. As explained in Walsh (2011), taking monetary policy decisions based on inadequate inflation measures can result in lags in policy responses and in higher inflation expectations.

References

  • Anand, R., E. Prasad and B. Zhang (2015) “What Measure of Inflation Should a Developing Country Central Bank Target” Journal of Monetary Economics, 74, 102–1116.

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  • Andrews, D. and H. Chen (1994) “Approximately Median-Unbiased Estimation of Autoregressive Models”, Journal of Business and Economic Statistics, 12 (2).

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  • Kireyev, A. (2015) “How to Improve the Effectiveness of Monetary Policy in the West African Economic and Monetary Union”, IMF Working Paper, 99.

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  • Rangasamy, L. (2011) “Food inflation in South Africa: Some implications for Economic Policy”, South African Journal of Economics, 79 (2), 184–201.

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  • Thamae, R and M. Letsoela (2014) “Food Inflation in Lesotho: Implications for Monetary Policy”, African Review of Economics and Finance, 6 (1).

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    • Export Citation

  • Walsh, J. (2011) “Reconsidering the role of food prices in inflation”, IMF Working Paper, 71.

1

Prepared by Francisco Arizala.

2

The transmission channel between monetary policy and inflation has been found to be weak in the WAEMU (Kireyev, 2015).

3

The persistence estimate correspond to the sum of the AR(.) coefficients that are significant (Andrews and Chen (1994)).

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Cover IMF Staff Country Reports
Togo: Selected Issues
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 310
Publisher:
International Monetary Fund
ISBN:
9781513562797
ISSN:
1934-7685
Pages:
33
DOI:
https://doi.org/10.5089/9781513562797.002
  • Figure 1.
    View in gallery
    Figure 1.

    GDP growth and Inflation in the WAEMU countries

  • Figure 2.
    View in gallery
    Figure 2.

    Monetary Policy in the WAEMU

    (Interest rates, in percent)

  • Figure 3.
    View in gallery
    Figure 3.

    Togo: Consumer Price Index

    (Contributions to year-on-year change by components, in percent)

  • Figure 4.
    View in gallery
    Figure 4.

    Togo: Total and Sub-Components of Inflation

  • Figure 5.
    View in gallery
    Figure 5.

    Transmission of shocks from food inflation to core inflation

Figure 1.

GDP growth and Inflation in the WAEMU countries
Figure 2.

Monetary Policy in the WAEMU

(Interest rates, in percent)
Figure 3.

Togo: Consumer Price Index

(Contributions to year-on-year change by components, in percent)
Figure 4.

Togo: Total and Sub-Components of Inflation
Figure 5.

Transmission of shocks from food inflation to core inflation