MONETARY POLICY AND INFLATION CONTROL IN RWANDA; 2006-2015

This study assessed the effectiveness of monetary policy to control inflation in Rwanda. It specifically determined the relationship between monetary policy variables and inflation employing vector autoregressive model on quarterly data spanning the period 2006 to 2015. After identifying all the variables to be of the same order i.e. I(1), this study employed the Johnsen cointegration test to determine long run relationships. The results indicated that real output followed by nominal exchange rate, money supply and interest rate significantly drives inflation dynamics in Rwanda. Additionally, results from Vector error correction model showed that only inflation inertia and real output affect inflation in the short-run with 12.3% speed of adjustment to restore long run equilibrium every quarter. Lagged period of inflation was determined to be an important determinant of inflation in short run. Putting together the findings from this study, policy wise would be for the monetary regulatory authority in Rwanda to effectively increase its communication with the public in order to reduce the impact of inflation expectations while also ensuring stable exchange rate movements to reduce the effects of imported inflation.