Inflation Dynamics, Monetary Policy, and Household Welfare in Sierra Leone: An Empirical Analysis
Abstract
This study examines the effects of inflation dynamics and monetary policy on household welfare in Sierra Leone, contributing to the growing literature on macroeconomic instability in fragile, resource-dependent economies. Using secondary data from household surveys, the Bank of Sierra Leone, the International Monetary Fund, and the World Bank covering the period 2000–2025, the study applies a robust quantitative framework comprising Structural Vector Autoregression (SVAR), fixed-effects panel regression, and Difference-in-Differences estimation to investigate the transmission of inflation shocks and policy interventions to household consumption and poverty. The findings demonstrate that inflation exerts a statistically significant and persistent negative effect on household welfare by eroding purchasing power, reducing real consumption, and intensifying poverty, with rural households experiencing disproportionately greater adverse impacts owing to limited financial inclusion, lower income diversification, and greater dependence on imported goods. Although expansionary monetary conditions provide modest short-term improvements in household consumption, the effectiveness of conventional monetary policy remains constrained by shallow financial markets and weak transmission mechanisms. The study further reveals that Sierra Leone's dependence on the extractive sector amplifies macroeconomic vulnerability, reinforcing structural imbalances associated with resource dependence and limiting the economy's capacity to absorb external shocks. By integrating macroeconomic indicators with household-level welfare analysis, the research extends existing evidence beyond aggregate economic outcomes to demonstrate the distributional consequences of inflation and policy responses. It concludes that sustainable improvements in household welfare require a coordinated policy framework centred on macroeconomic stability, deeper financial inclusion, economic diversification, strengthened institutional governance, and well-targeted social protection measures capable of enhancing resilience and promoting inclusive, long-term economic development in Sierra Leone and comparable fragile economies.
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