Inflation Dynamics in Botswana and Bank of Botswana's Medium-Term Objective Range

Abstract

This study is motivated by the high and unpredictable episodes of inflation in Botswana over the last 20 years. This is despite the Bank of Botswana's concerted effort to keep inflation at its minimum and stable over time. More specifically, the Bank has been attempting to bring down and keep inflation within the medium-term objective range of 3 to 6 percent. The objectives of this study are therefore to (a) examine inflation dynamics in Botswana by identifying the factors that have determined its movements overtime, and (b) assess the likelihood that the Bank of Botswana’s medium-term objective range of 3 to 6 percent could be achieved in the short to medium-term (one and half to two years). The main conclusions of the study are: (a) price inertia, real GDP, money supply and South African prices play a dominant role in determining inflation in Botswana; and (b)useless international deflationary environment prevails, the probability that Bank of Botswana will achieve its medium-term objective range of 3 to 6 percent in the medium-term is very low, according to the policy simulation results in this study.