Abstract:
The transmission of commodity price shocks on domestic economy has been widely researched because of its power to change the welfare of people and can even cause a crisis. This research investigates the transmission of commodity price shocks on domestic economy in Rwanda using time series data between 2013 and 2022.
The CPI model is designed and tested using Eviews7, the macroeconomic data were collected from National Bank of Rwanda, NISR, Federal Reserves of Saint Louis and analyzed using ARDL and ECM model to estimate long run and short run relationship. The results indicates that commodity price shocks are a good predictor of inflation.
The coefficient of food index in relation to CPI is positive (+0.491150) which is statistically significant at 5% level in long run. This means that 1% increase in overall food price leads to 0.49% increase in inflation. The coefficient of oil index in relation to CPI is negative (-0.339213) which is statistically significant at 5% level. This means that 1% increase in overall oil price on international market leads to 0.33% decrease in inflation. The coefficient of export in relation to CPI is positive (+3.55) which is statistically significant at 5% level. This means that 1% increase in export leads to 3.55% increase in inflation in long run.
In short run, the oil prices will have a substantial impact on inflation than any other commodity because they have a short-term positive relationship. There are some limitations related to the amount of data available. The study recommended some strategies to minimize impact of commodities prices shock to domestic economy in Rwanda such are provision of subsidies on food imports.
