Mauritius Adopts IMF’s QPM Model to Strengthen Inflation Targeting and Policy Forecasting

The International Monetary Fund's working paper "Mauritius QPM: A Quarterly Projection Model for the Bank of Mauritius", a collaboration between the IMF's Institute for Capacity Development (ICD), the African Department (AFR), and the Bank of Mauritius (BoM), marks a milestone in the island's journey toward modern, data-driven monetary policymaking. The paper introduces the Quarterly Projection Model (QPM), an advanced forecasting framework designed to enhance the BoM's capacity to predict economic trends, analyze risks, and make more forward-looking policy decisions in an increasingly unpredictable global economy.

A Small Island with Big Economic Challenges

Mauritius, a small and open economy, faces constant exposure to global shocks, from commodity price surges and trade disruptions to tourism slowdowns and climate risks. These structural vulnerabilities, the IMF notes, demand a more systematic and transparent approach to monetary policy. The QPM offers precisely that, a comprehensive "policy laboratory" that allows the BoM to simulate how shifts in interest rates, global demand, or the exchange rate could affect inflation and growth over time. The model supports a gradual transition toward inflation targeting, improving the central bank's ability to stabilize prices while supporting sustainable growth.

The Core Mechanics: How the QPM Works

Built on New Keynesian foundations, the Mauritius QPM integrates both theory and empirical evidence to describe the economy's behavior. It includes three key components: a forward-looking Phillips Curve linking inflation to demand and exchange rate changes; an IS Curve capturing how interest rates influence output; and a monetary policy rule representing how the BoM reacts to inflation and output deviations from their targets. Expectations of inflation, growth, and policy rates play a central role, ensuring that the model mirrors real-world decision-making behavior.

The model is calibrated using Mauritius-specific data, reflecting the nation's high trade openness and sensitivity to external shocks. Because imports and exports together exceed the country's GDP, exchange rate pass-through becomes a major inflation driver. The model thus accounts for how global developments, commodity prices, partner-country growth, and foreign interest rates shape domestic economic outcomes.

Simulating Policy Shocks and Trade-Offs

The IMF paper vividly demonstrates the QPM's practical utility through several simulation exercises. In one scenario, an import price shock raises inflation sharply; the model recommends a policy rate hike to restore stability, albeit at a short-term cost to output. In another, a drop in foreign demand leads to slower growth, prompting a more accommodative stance to cushion the economy. A third scenario explores the impact of currency depreciation, showing how it fuels short-term inflation but boosts competitiveness and export recovery.

These simulations are not theoretical experiments but tools for real-time decision-making. They reveal how different policy choices create trade-offs between stabilizing prices and supporting growth, insights essential for small economies navigating volatile global conditions.

A Tool for Transparency and Credibility

Beyond its technical precision, the QPM is transformative for policy communication. It enables the Bank of Mauritius to present coherent, data-backed projections in its Monetary Policy Reports, improving the transparency and predictability of decisions. By offering baseline forecasts alongside alternative risk scenarios, the central bank can better explain its rationale to markets and the public, anchoring inflation expectations more effectively. The IMF stresses that such clarity strengthens institutional credibility, an invaluable asset in a world where policy trust can shape market stability as much as interest rates themselves.

Building Capacity for the Future

The paper also highlights that sustaining a model like the QPM requires continuous investment in human and analytical capacity. The IMF recommends regular training for BoM economists in model maintenance, forecasting, and scenario design. It further encourages collaboration with peer institutions in other small island economies that have adopted similar frameworks. This networked approach ensures the model remains dynamic, adapting to structural changes such as digitalization, green transitions, and climate shocks.

Ultimately, the Mauritius QPM is more than a technical upgrade; it represents a strategic leap in central banking. By embedding a forward-looking, model-based culture within the institution, the Bank of Mauritius is equipping itself to navigate global uncertainty with greater precision and confidence. As the IMF authors conclude, this initiative places Mauritius at the forefront of economic innovation in Africa, setting a benchmark for small, open economies striving to balance resilience with growth.