Inflation in Sierra Leone: An Empirical Analysis of the Impact of Interest Rate on Price Level Changes
Inflation in Sierra Leone: An Empirical Analysis of the Impact of Interest Rate on Price Level Changes

Summary/Abstract: This research intends to investigate the impact of interest rate on inflation in Sierra Leone. The research used of Autoregressive Distributed Lag model (ARDL) on time series Data, for the period 1970 – 2016. The results show that interest rate is inflationary in both the short-run and long-run as its positively and significantly influence inflation in the two periods which is in conformity with the arguments of the fiscal policy supporters but contrary to the arguments of the monetary policy supporters. The findings, of the study, are limited to the 1970 – 2016-time series data of Sierra Leone used as well as the econometric method of data analysis adopted – ARDL. The research’s findings imply that interest rate in Sierra Leone is inflationary. Increase in the rate of interest will lead to an increase in the inflation rate. Therefore interest rates should be adjusted with caution, and it also implies that fiscal policy will be very effective in converting inflation in the country. The research attempted to investigate the nature of the effect of interest rate on inflation. As it could be inflationary (as claimed by fiscalist) or disinflationary (as claimed by monetarist) which the empirical results accord the arguments of the fiscal policy supporters in both the short-run and long-run having a positive influence on inflation significantly.

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