The impact of monetary policy on consumer price index (CPI): 1985-2010
par Sylvie NIBEZA
Kigali Independent University (ULK) - Master Degree 2014
In this research the impact of monetary policy on consumer price index (CPI), secondary data has been used. Secondary data are collected from NBR library and on the World Bank Website. In which there four variables such as: CPI, Money supply, Nominal Interest Rate and Exchange rate.
The study period consist of 25 years, from (1985-2010).
In this research, software used to analyze data is Eviews7.
ü Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a measure of changes in prices of goods and services within the household basket. In Rwanda the CPI is a Modified Laspeyres index that currently measures changes in prices of 1,136 goods and services in five provinces in Rwanda.
Economic: The CPI permits monthly inflation monitoring. It is equally used as a deflator for a number of economic aggregates (consumption, revenues...) for measuring evolution in real terms (at constant prices).
Social-economic: In this case the monthly published CPI is also used in adjusting a number of public and private agreements like minimum wages, pensions, social benefits to mention a few Monetary.
Financial: The CPI is as well used extensively in monetary policy and in regional and international price comparison purposes.
Production and Publication: The CPI in Rwanda is published monthly by the National Institute of Statistics of Rwanda that works in collaboration with the National Bank of Rwanda on the 15th of the preceding month. In constructing the index, the consumption nomenclature adopted is derived directly from the international nomenclature COICOP (Classification of individual consumption by purpose; SNA revision IV 1993) ( http://www.statistics.gov.rw/indicator/consumer-price-index).
It consists of 12 divisions that are further divided into groups, classes, categories and products and services.
The 12 categories include:
· Food and non-alcoholic beverages
· Alcoholic beverages and Tobacco
· Clothing and footwear
· Housing, water, electricity, gas and other fuels
· Furnishing, household equipment and routine household maintenance
· Recreation and culture
· Restaurants and hotels
· Miscellaneous goods and services
ü Money Supply (M2)
Money supply is the total amount of money available in an economy at a particular point of time. The importance of an appropriate monetary aggregate can hardly be over emphasized, particularly for those countries that attach their monetary policy to monetary aggregates. The breakdown of stable relationship between monetary aggregates and macroeconomic variables due to structural change in financial markets and emergence of new financial instruments led to frequent changes in the definition of monetary aggregates. In practice more than one monetary aggregate are usually defined in the hope that multiple aggregates may collectively provide more information for the conduct of monetary policy and developments in the economy.
ü Interest Rate
The term interest rate usually means any bank lending rate. However, the rates don't always move rapidly because they are driven by different forces. On treasury notes, like any loan, the interest rates are fixed. However, Treasury notes are auctioned to the highest bidder. Depending on the demand at auction, the note could cost more or less than face value. However, at the end of the note's term, the Government pays back full face value to the bidder. In effect, bidders are loaning the bid amount to the Government. In return, they get the interest rate and the full face value.
ü Exchange rate
Exchange rate regime considerations play a strong role in influencing monetary policy in a country. The rate of exchange means the price of one currency in comparison with another currency.
Mishkin (1997) argued that «if a Central Bank does not want to see it currency fall in value, it may pursue a more contractionary monetary policy and reduce the money supply to raise the domestic interest rate, thereby strengthening its currency.