Energy price shocks and consumer price index dynamics: A comprehensive analysis of the impact on household expenditure in Rwanda ( Jan 2011-Jun 2023)

Abstract

This comprehensive study conducts a thorough analysis of the dynamic interplay between energy price shocks and the Consumer Price Index (CPI) in Rwanda, spanning from 2011Q1 to 2023Q2. Against the backdrop of Rwanda's evolving economic landscape, the research addresses the unique challenges and opportunities faced by the nation in its pursuit of sustainable economic growth amid external vulnerabilities. The study employs a robust methodology, Robust methodology integrates predefined objectives and statistical analyses. Variables, including HE, EPI, taxes, FNB, and EDN, exhibit nonstationarity at I(1). Lag-order selection identifies optimal lag of 4. Johansen cointegration tests confirm long-term relationships. The study's findings are multifaceted, highlighting the necessity for dynamic modeling due to non-stationarity at I(1). The lag of 4 is deemed optimal for short-term dynamics, supported by Johansen cointegration tests indicating long-term relationships among variables. The Vector Error Correction Model (VECM) reveals dynamic relationships in the short run, with lagged energy prices and the education index significantly impacting household spending. The Error Correction Term (ECT) emphasizes the model's capability to capture short-run deviations from long-term equilibrium. The normalized Johansen long-run equation elucidates significant roles for energy prices, taxes, food expenditures, and the education index in shaping household spending patterns over the long run. Given the negative relationship between energy prices and household spending in the long run, indicative of reduced disposable income, policy interventions are crucial. Short-term measures involve implementing social safety nets and consumer education to mitigate immediate impacts. Long-term recommendations encompass diversifying energy sources, implementing progressive tax policies, and developing crisis preparedness plans. These interventions aim to enhance economic resilience and address the unique challenges in Rwanda's development journey. This study contributes a nuanced understanding of the complex dynamics between energy price shocks and household expenditure in Rwanda. The findings serve as a foundation for informed decision-making and policy formulation, offering practical insights for policymakers navigating the delicate balance between economic development and external vulnerabilities in the pursuit of sustainable growth. The research underscores the importance of considering both short-term and long-term implications, providing a comprehensive view of the economic landscape.