Assessing the risks of imported inflation in the SADC region: case study of Madagascar

Abstract

SADC member countries seeking macroeconomic convergence need to study how their domestic markets respond to price shocks in the markets of other member countries. This paper shows that this crucial question deserves to be asked. It is important to know which country represents the greatest risk of inflation transmission. The empirical literature on the analysis of the extent of inflation transmission remains very mixed. The aim of this article is to answer this question, taking the case of Madagascar within the SADC. The results show that countries with a high trade intensity with Madagascar present the greatest risk. Inflation transmission is also explained by countries' inflation histories. Price rises within the Regional Economic Community (REC) are more rapidly transmitted to domestic prices than price falls. At the end of this analysis, another question merits consideration: does inter-regional trade alone explain imported inflation?