Modeling Inflation Rates in Liberia; SARIMA Approach

Abstract

This thesis models Liberia’s Inflation rates using the Box-Jenkins Methodology. It was modeled using seasonal autoregressive integrated moving average which extends the ARIMA model to capture seasonality. The monthly inflation data spanning the period January 2006, to December 2013 from the Research Department of the Central Bank of Liberia was used in this study. It is important to understand the pattern of inflation in a country in order to formulate better policies that will control inflation rates.The Hyndman-Khandakar algorithm selected ARIMA (0;1;0)(2;0;0)12 as the best model for Liberia inflation series. Further residual analysis such as Autoregrssive Conditional Heteroscedsaticity Lagrange Multiplier test and Li-Jung Box test show no evidence of ARCH effect and serial correlation respectively. Lastly, a 12 months forecast for the year 2013 with the model revealed that Liberia is likely to experience single digit inflation values. In glow of the forecast result, it is recommend that vigorous monetary policies and appropriate economic measure be adopted by government and some policy makers to make certain that the single digit inflation values aim are met.