Effect of Economic Recovery and Adjustment Policies on The Friedman-ball Hypothesis and The Cointegration of Inflation and The Uncertainty of Inflation in Africa.

Abstract

This paper examines the possible effects of World Bank and IMF economic recovery policies on the long run relationship between monthly inflation rates and the uncertainty of inflation in three Sub-Saharan African countries. We selected Senegal, Ghana and Uganda for this investigation because at a point they were considered by IMF and World Bank to be the more promising among African countries in their efforts to emerge from economic stagnation. Based on a GARCH (1, 1) framework, we generate a time series of conditional variances of inflation as proxies for uncertainty of inflation and use cointegration techniques to determine existence of a long run relationship with inflation rates. We examine the latter relationship within the context of the Friedman-Ball Hypothesis. GARCH results show persistence in volatility which provide evidence of the presence of both ARCH and GARCH terms in inflation rates of all countries and across all economic regimes. Also, the outcome of cointegration results show long run equilibrium links between inflation rates and its uncertainty. Senegal and Uganda provide strong empirical support for the Friedman Ball hypothesis. Evidence from Ghana is mixed and seems to reflect the impact of new policy initiatives in the adjustment era.