Stagflation and Macroeconomic Dynamics in Zambia: Evidence from Inflation, Labour Market, Interest Rate, and Exchange Rate Indicators

Abstract

Stagflation continues to pose a significant macroeconomic issue in developing economies, as it amalgamates persistent inflation, subpar labour market performance, and macroeconomic instability, hence limiting policy efficacy and long-term growth. This study investigates the effects of stagflation on key macroeconomic indicators in Zambia, namely inflation rates, labour market dynamics, the central bank's policy rate, and the exchange rate. The study applies a Vector Error Correction Model (VECM) using annual time-series data from 1964 to 2024, guided by unit-root and Johansen cointegration tests, to analyse short-term dynamics and long-term equilibrium correlations among the variables examined. The findings indicate that Zambian inflation exhibits strong persistence, with an insignificant error-correction term (ECT = − 0.304, p = 0.927) showing limited short-run adjustment toward long-run equilibrium, while the significantly negative lagged inflation coefficient (∆CPIt-1 = − 0.412, p = 0.003) confirms partial but constrained self-correction; conversely, labor-market disparities adjust slowly, suggesting structural inflexibilities within the Zambian economy.Moreover, the results reveal that the central bank's policy rate responds significantly to systemic instability and debt-related pressures, whereas exchange-rate fluctuations are significantly affected by persistent imbalances and constraints on external financing. Within this framework, inflation, labor market difficulties, shifts in monetary policy, and exchange rate fluctuations are interconnected, each exacerbating the others. Therefore, this research underscores the crucial need for a cohesive policy approach to ensure Zambia's long-term economic stability.The proposed strategy demands a holistic methodology, encompassing monetary, fiscal, and structural policies. This integrated approach is indispensable, given that inflation, debt, labor market challenges, and exchange rate volatility are not discrete issues; instead, they are interconnected occurrences that necessitate a cohesive policy intervention.