Determinants of Inflation in Suriname: An Analysis for 1971 to 2018

This paper studies the main drivers of inflation in Suriname over the period 1971 to 2018. The motivation to investigate the determinants of inflation in Suriname is based on the various episodes of inflation the country went through. Hence, to conduct effective monetary policy, it is of great interest to identify the key drivers of inflation. The variables in the econometric model are selected based on relevant empirical literature and the characteristics of the Surinamese economy. We test for unit roots and conducted the necessary data transformations. Consequently, we employ cointegrating regression, as we encountered at least one cointegrating relationship. More specifically, we utilize a dynamic ordinary least squares regression model that separates the long-run from the short-run effects. The long-run results reveal the strong impact of the exchange rate on consumer prices in Suriname. The exchange-rate pass-through is almost a one-on-one, in the long run. A depreciation of the USD/SRD exchange rate translates rapidly to consumer prices because of the high import intensity of the country. Output and broad money also have an upward effect on consumer prices, while the impact of oil prices and the interest rates on the price level is relatively low. The relatively low impact of international oil prices on consumer prices may be ascribed to fuel price subsidies by different regimes in the period under consideration. The results from the long-run equation are robust since the residuals pass the relevant diagnostic tests. The short-run estimations suggest that inflation is mainly caused by the exchange rate. Changes in the money supply, oil price changes, and inflation persistence also account for contemporaneous inflation. Economic growth and trade openness are found to significantly dampen the inflation rate in the short run. The error-correction term which is negative and statistically significant, confirms at least one cointegrating relationship. Based on the findings of this study, policymakers in Suriname are urged to adhere to active monetary and liquidity-managing policies aimed at achieving a stable exchange rate and low inflation. We also suggest promoting trade openness by increasing exports, as trade has a dampening effect on inflation.