An Applied Macro-econometric Model for Supply Constrained African Economy: A Rwandan Macro Model

Abstract

In this study we have developed a macro-econometric model for a typical supply constrained African economy. This is aimed at developing a theoretical and empirical template for such policy tools that are increasingly being demanded in African ministries of finance and central banks. We have concretized it by building a macro-econometric model for Rwanda. The Rwanda macro-econometric model has 107 equations, of which 72 are endogenous. In addition, a supplementary ARIMA based model with 33 equations for exogenous variable is built to make the model useful for forecasting. The fiscal, balance of payment and money supply block of the model is fairly disaggregated to offer an adequate picture of the macro economy. An econometric estimation of the core behavioral equations of the model using equilibrium [error]-correction approach, with the database that stretches from 1960 to 2009 is made. The model can easily be further extended to the support budgeting, forecasting and macro-economic policy analysis work at the relevant ministries and central banks in Africa. We have managed to successfully solve the model and reproduced historical values from 1999 to 2009, and forecasted major macro variables for the year 2010 to 2015. We have also used the model to conduct a policy and external shock related simulation exercise that is very important for policy makers. We hope this model offers a theoretical and empirical framework for building similar applied macro models across Africa.