Methodology Note: Pan-African Inflation Forecast Model

Introduction and framework

Our Pan-African inflation forecast model is anchored in a robust Vector Autoregression (VAR) framework, reflecting the highest standards in econometric modelling. This approach, pivotal for capturing the complex interactions among multiple economic indicators, offers a sophisticated analysis platform for understanding the nuances of inflation across different African countries. The VAR model's strength lies in its ability to account for dynamic interrelationships between various time-series variables, each influenced by their historical values and those of other variables in the system. This comprehensive methodology ensures a thorough and multifaceted analysis of the factors influencing inflation.

Country-specific adaptation and generalisation

The VAR model, while maintaining a consistent methodological foundation, is carefully adapted to the specific economic contexts of each African country. 

• In Nigeria, the dataset extends from 2005 to the present, incorporating variables like the parallel market exchange rate, exchange rate risk premium, international food prices, money supply growth rate (M2), and premium motor spirit prices. These factors are integral in deciphering Nigeria's unique economic fabric, especially the heightened significance of the parallel exchange rate movements. 
• In Kenya, our model spans from 2012 to the present, adapting to include the official exchange rate, electricity, lending rates, and other critical indicators like international food prices and money supply (M2) at levels. 

Identification and variables selection

Informed by a broad spectrum of academic literature and economic theories, our model begins with a strategic selection of variables that capture the essence of inflation dynamics. This process is grounded in a deep understanding of