Measuring persistence in inflation: evidence for Angola

Abstract

The purpose of this paper is to examine the degree of persistence in five inflation indicators for Angola, and to identify the implications for decision-making. Understanding inflation persistence in Angola is crucial because the National Bank of Angola is preparing to change its monetary policy focus to a more inflation-targeting regime. Our results suggest that when structural breaks are accounted for, all five inflation indicators are stationary, so that a shock will give temporary effects. Secondly, our findings suggest that persistence is not too high. Moreover, the degree of persistence is similar among the five inflation indicators and throughout the sample period. Finally, our results also show that extracting the most volatile components of the headline inflation indicator does not generate a new inflation indicator that is less volatile and more persistent than the original. These results have important implications for the design, implementation and effectiveness of monetary policy in Angola, especially when following an inflation-targeting regime. First, a not too high degree of persistence means monetary policy aiming for price stability must be implemented with a permanent policy stance. Secondly, a low degree of persistence also means that inflation can be stabilized in a short period of time following a shock. Lastly, the results are also relevant for prediction and modeling purposes.