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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Inflation and Macroeconomic Instability in Madagascar
Author:Azam, Jean-PaulISNI
Periodical:African Development Review
Geographic term:Madagascar
economic conditions
Economics and Trade
External link:https://onlinelibrary.wiley.com/doi/10.1111/1467-8268.00036/pdf
Abstract:This paper argues that the rate of inflation is the crucial (proximate) determinant of macroeconomic instability in Madagascar. After a statistical description of the recent macroeconomic history of this country, which indicates the relationship between the rate of inflation and the real exchange rate, the paper offers a description of the central bank's behaviour with respect to foreign exchange reserves and credit to the government. Next, a simple monetary model with rational expectations is used to explain the simultaneous determination of the rate of inflation, the real exchange rate, and their joint volatility. It suggests that the inflation rate is the fundamental component of macroeconomic instability: when the inflation rate rises above a certain threshold, the rational expectations equilibrium is not locally unique, and the model predicts that a strong volatility of the two endogenous variables sets in. An econometric analysis confirms that the rate of inflation has a significant positive impact on its own volatility, and on the real exchange rate and its volatility. Bibliogr., sum. in English and French.