Monetary Policy, Foreign Exchange Intervention and Exchange Rate Volatility in Zambia

Monetary policy and foreign exchange intervention reaction functions are estimated for Zambia over the period 1995.01-2008.12 using GMM to determine the extent to which the central bank takes into account in its policy decisions, output and inflation deviations from trend and target as well as changes in exchange rate volatility. While monetary policy stabilises inflation and accommodates output fluctuations, the policy response to inflationary pressures is relatively low. Thus, a comprehensive review of the current monetary targeting framework is required to enhance the inflation control objective. Exchange rate volatility is a dominant factor in both monetary policy and foreign exchange intervention decisions.