RESEARCH PAPERS

The Central Bank of Solomon Islands (CBSI) Working Paper Series disseminates work-in-progress research papers by CBSI staff to stimulate economic and financial debates. The views expressed are solely those of the authors and do not necessarily reflect those of the CBSI. We encourage feedback from stakeholders. Copies of the working papers can be downloaded below.

A Money Demand Function of the Solomon Islands, June 2014 CBSI Working Paper No. 2014/01
By Kenneth Especkerman-True, Elizabeth Ragimana, Patricia Samani, Vitarina Takana

The aim of this paper is to estimate a money demand function for the Solomon Islands for the period 2002-2012. A stable money demand relationship argues for the existence of a predictable channel such that monetary policy, aimed at controlling money supply, will achieve price stability through demand management. From our study, we find that there is evidence to support the notion of implementing monetary targeting as opposed to inflation targeting in the Central Bank of Solomon Islands’ efforts to combat inflation.

Understanding the Monetary Policy Transmission Mechanism of the Solomon Islands, July 2014
CBSI Working Paper No. 2014/02
By Kenneth Especkerman-True, Patricia Samani, Vitarina Takana

The aim of this paper is to understand the impacts of changes in monetary policy variables, monetary aggregate (M1) and the exchange rate, on two policy variables, namely output and inflation in the Solomon Islands. From our study, we find that between 2002 and 2012, inflation and output are, in the main, explained by their own shocks. We also conclude that exchange rate shocks are limited in their influence over inflation but are more effective than monetary supply shocks, which we find to be negligible in the short-term. Finally, we find that exchange rate and monetary shocks affect inflation and real output after one quarter but are short-lived with impacts fully absorbed within six months. In order to improve the transmission mechanism, we recommend that the Central Bank should pursue policies aimed at deepening the financial sector and enhancing competition.

Determinants of Inflation in the Solomon Islands, March 2015
CBSI Working Paper No. 2015/01
By Kenneth Especkerman-True, Patricia Samani, Vitarina Takana

This paper seeks to shed light on the key determinants of inflation in the Solomon Islands by undertaking an empirical study for the period 2003-2012. Using quarterly times series data, our results are two-fold. First we find that in the long-run, both money supply and government spending play an important role in the inflationary processes in the Solomon Islands. Second, in the short-run, the one-period lag or dynamics of nominal effective exchange rate does affect the inflation rate. There is clear evidence that the inflation is both affected by both domestic and external pressures.

Constructing a Quarterly Measure of Gross Domestic Product and Output Gap for Solomon Islands, September 2015
CBSI Working Paper No. 2015/02
By Louisa K Baragamu, Vitarina Takana

The objective of this paper is to estimate an output gap for the Solomon Islands economy using annual data from the years 2002 to 2014. Since the output gap cannot be measured directly, we use various economic indicators to first construct a quarterly real GDP indicator series using two statistical processes, the Chow-Lin procedure and the Fernandez approach. Using the quarterly series, we then estimate a measure of the output gap using two mechanical filtering techniques; the Hodrick-Prescott filter and the BN decomposition filter. We find that the output gap for the Solomon Islands was below zero in 2014, meaning that the economy was producing below its potential output that year. This indicates no inflationary pressures from the demand side in the medium term.