Forecasting inflation under terms of trade shocks: the case of Angola

Abstract:In this paper, we propose a reduced form error correction representation to model the relationships between money, the exchange rate, terms of trade, and the price level, considering the case of Angola. Using monthly data from 2007:03 to 2018:03, we identify two long-run relationships that we identify as a money demand relationship and a relationship involving the real exchange rate and terms of trade. In both cases, long run money neutrality is not rejected. As for the short run, our results indicate that “excess depreciation” contains useful information to forecast the inflation rate, whereas “excess liquidity” does not.

JEL Classification: E41, F41, E5.

Key-Words: Real Exchange Rate, Money Demand, Terms of Trade, Angola.

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angolaagre.pdf