Inflation Targeting in Mauritius: Time to Make a Move
May 2014
Section 5(2)(a) of the Bank of Mauritius Act (2004) requires the Bank to determine, with the
concurrence of the Minister, the accepted range of the rate of inflation consistent with the pursuit
of price stability. In operational terms, this means that the Finance Minister and the Governor
have to agree on an inflation target.
This paper motivates the need for the authorities, namely MOFED and BOM, to work on the
adoption of an explicit inflation targeting regime for Mauritius. The year-on-year inflation rate is
shown below, on a monthly basis, from January 1999 to March 2014.
Year-on-Year Inflation Rate (%), Jan 1999 - Mar 2014
14
12
10
8
6
4
2
0
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13 14
Year-on-Year Inflation Rate (%), Jan 1999 - Mar 2014
Descriptive Statistics
30
25
20
15
10
5
0
0
2
4
6
8
10
12
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
5.555158
5.048077
12.27621
0.085324
2.471319
0.721602
3.253558
Jarque-Bera
Probability
16.37185
0.000279
Over the last 15 years, the Mauritian inflation rate has varied from a low of 0.09% to a high of
12.3%, with an overall average of 5.6%. The data is skewed to the right, implying some
unusually high inflation rates. A visual inspection indeed reveals that the period 2006 to 2008
experienced significantly higher inflation.
The diagrams also highlight the existence of inflation regimes and the occurrence of breaks in
the data. For example, a positive break around 2006 takes inflation to a higher level while a
negative break around 2008 takes inflation back to a lower level. Importantly the breaks seem to
have had only a temporary effect on inflation level, which therefore facilitates the development
of an inflation target or target range.
The existence of breaks requires an econometric model that accounts for breaks in the estimation
process. This paper employs a model that estimates the number of breaks as well as the break
dates, finding the existence of three breaks occurring in July 2006, January 2009 and March
2011 respectively.
Year-on-Year Inflation (%), Jan 2000 - Mar 2014
16
12
8
4
4
2
0
0
-2
-4
00
01
02
03
04
05
Residual
06
07
08
Actual
09
10
Fitted
11
12
13 14
The breaks are basically characterized by jumps in the data and lead to four different equations
describing the evolution of inflation. The implied steady-state or equilibrium inflation rates are
computed and tabulated below.
Period
Equilibrium Inflation Rate (%)
Jan 2000 – Jun 2006
5.11
Jul 2006 – Dec 2008
9.21
Jan 2009 – Feb 2011
3.37
Mar 2011 – Mar 2014
4.53
The equilibrium inflation rates have varied over the last 15 years but do not display any tendency
to explode.
Recommendation: The implied current equilibrium of 4.5% for the year-on-year inflation rate is
below the overall average of 5.6% and marks a good opportunity for moving to an explicit
inflation target of “Around 5%”.
A flexible inflation target shall anchor inflation expectations, enhance both the independence and
accountability of the MPC, and boost “intelligent” debate on monetary policy.
Time to Make a Move!
Jameel Khadaroo PhD(Bristol)
Associate Professor, UOM
Former Deputy Governor, BOM
[email protected]
Appendix: Estimation of Model with Breaks
Dependent Variable: INF
Method: Least Squares with Breaks
Date: 04/29/14 Time: 23:10
Sample (adjusted): 2000M01 2014M03
Included observations: 171 after adjustments
Break type: Bai-Perron tests of L+1 vs. L sequentially determined breaks
Break selection: Trimming 0.15, Max. breaks 5, Sig. level 0.05
Breaks: 2006M07, 2009M01, 2011M03
Variable
Coefficient
Std. Error
t-Statistic
Prob.
12.44585
-3.513517
0.0000
0.0006
19.63084
-5.272389
0.0000
0.0000
8.911746
-2.163778
0.0000
0.0319
11.64297
-3.863828
0.0000
0.0002
2000M01 - 2006M06 -- 78 obs
C
INF(-12)
6.932057
-0.357050
0.556977
0.101622
2006M07 - 2008M12 -- 30 obs
C
INF(-12)
13.06279
-0.419308
0.665422
0.079529
2009M01 - 2011M02 -- 26 obs
C
INF(-12)
3.814510
-0.131759
0.428032
0.060893
2011M03 - 2014M03 -- 37 obs
C
INF(-12)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
6.633886
-0.463221
0.779795
0.770338
1.202209
235.5849
-270.0334
82.45972
0.000000
0.569776
0.119887
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
5.458159
2.508623
3.251852
3.398831
3.311490
0.480330