The Dynamic Interaction of Inflation, Monetary Policy Rate and Economic Growth: Evidence from Zambia

Abstract

Sustained economic growth relies heavily on the stability of key macroeconomic indicators. This study examines the dynamic interactions among economic growth, inflation, and the monetary policy rate in Zambia over the period 2012–2022 using a Vector Autoregressive (VAR) framework. Optimal lag length was determined based on the Akaike Information Criterion (AIC), Schwarz Criterion (SC), and Hannan–Quinn Information Criterion (HQ). Diagnostic tests confirm that the model is robust, with no evidence of serial correlation, heteroskedasticity, or structural breaks. Empirical results indicate a generally negative relationship between economic growth and inflation, while neither variable exerts a statistically significant effect on the monetary policy rate. The analysis also reveals that causal dynamics among the variables are unstable in the short run. Forecast simulations suggest that all three variables may rise in the near term but are likely to moderate or decline over the medium to long term. The findings underscore the need for coordinated monetary and fiscal policies, strengthened transmission channels, and targeted structural investments to support sustainable economic growth while maintaining price stability in Zambia.