Long and short run effects of inflation on output in Zambia:1964-2015

The inflation-output nexus is one of the most important macroeconomic relationships that has
attracted considerable research interest for many years. For most developing countries, monetary
authorities strive to achieve price stability. This is done in order to avoid the costs and
uncertainties associated with inflation. In addition, achieving a sustainable path of output growth
is a key objective of most developing countries. This study adopts a bivariate vector error
correction (VEC) model composed of output and inflation in order to test the effect of the latter
on the former in Zambia over the period 1964-2015. The study also conducts Granger causality
test to evaluate the direction of the causal relationship between inflation and output in Zambia.
Empirical results show that there is a cointegrating relationship between inflation and output in
Zambia. Elasticity estimate show that for a 1% increase in inflation, the average value of output
growth decreases by 5.4%.The results further indicate a unidirectional causality running from
inflation to output. Therefore, authorities should aim at controlling inflation in order to safeguard
output and growth. This calls for fiscal and monetary policy coordination in order to safeguard
output whilst ensuring price stability in the economy.
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Keywords: Inflation, Output Growth, VAR/VEC, Cointegration, Granger Causality
JEL Classification: E31, O11, O42, O55