Democratic Republic of the Congo: Selected Issues

This Selected Issues paper examines the long- and short-run drivers of inflation in the Democratic Republic of the Congo (DRC), with a focus on identifying the most effective nominal anchor for price stability. Long-run inflation dynamics are assessed using break-robust integration tests and cointegration stability diagnostics, while short-run dynamics are analyzed through a Structural Vector Autoregression framework, including impulse response functions and forecast error variance decomposition. The findings indicate that both broad money and the exchange rate exhibit long-run relationships with prices; however, the exchange rate emerges as the tighter, more stable, and faster-adjusting nominal anchor. In the short run, inflation is driven primarily by domestic exchange-rate shocks, with monetary policy and liquidity conditions playing supporting roles. These results highlight the importance of strengthening the role of the exchange rate within the monetary policy framework, addressing structural dollarization to restore monetary control, and improving foreign-exchange market functioning. Together, these measures could strengthen inflation management and support more durable price stability in the DRC.