The Effect of Inflation on the Trade Balance of Sierra Leone: A Cointegration Analysis

Investigating the impact of inflation and its consequences on Sierra Leone's trade balance between 1980 and 2022 is the main goal of this research project. The variables were included in the same sequence as suggested by the Dickey-Fuller test findings. Recognizing how the rate of inflation affects trade balance both now and, in the future, the Johansen Cointegration result looked at the immediate dynamics of the variables as well as the pattern of their long-run interactions. The explanatory variables: inflation and real GDP have an adverse and significant effect in the near term, in contrast, the actual effective rate of exchange greatly impacts Sierra Leone's trade balance. On a long-term basis, real GDP, supply of money, inflation, and actual effective rate of exchange have a substantial impact on trade balance. Maximizing trade-offs requires more than just implementing a sound exchange rate strategy. It highlights the need for further steps in bolstering the economy's external sector as well as changes in exchange rates influencing inflation. The study demonstrates the interrelationships among the actual rate of exchange, inflation, and trade balance with respect to the small developing country of Sierra Leone