Commodity Prices and Monetary Dynamics in Zambia

This paper examines how external commodity shocks, exchange rate depreciation, and monetary policy shocks shape macroeconomic adjustment in Zambia. Using monthly data from 2010 to 2024, the analysis applies sign-restricted local projections to trace the responses of output, inflation, exchange rates, policy rates, and lending conditions. The copper-to-oil ratio serves as the baseline indicator of Zambia’s external commodity position because it captures copper export-price gains relative to oil import costs. Robustness checks use separate copper-price and oil-price systems, a longer signrestriction window, state-dependent specifications, and Bayesian VAR evidence. The results show that favorable copper-to-oil shocks lower inflation, ease lending conditions, support kwacha appreciation, and gradually raise output. Exchange-rate depreciation shocks generate persistent inflationary effects, confirming strong exchange-rate passthrough in Zambia´s import-dependent economy. Monetary-policy shocks reduce output and affect financial conditions, but do not produce a clean disinflationary response in the linear baseline, indicating constrained transmission and price-puzzle dynamics. State-dependent results show that transmission varies across inflation and commodity regimes, with weak commodity conditions amplifying inflationary and exchange-rate stress. The findings imply that stabilization in Zambia requires stronger external buffers, credible monetary-fiscal coordination, deeper financial intermediation, and reduced exposure to imported cost shocks.