Determinants of Inflation in Somalia: An ARDL Approach

Abstract

This study delves into the effective management of inflation by analyzing its determinants, highlighting the importance of low inflation as an indicator of macroeconomic stability. The research explores the interplay between Broad Money Supply, Gross Domestic Product (GDP), and Exchange rate, within the framework of Somalia's inflation, using time series data from 1970 to 2010. An Autoregressive Distributed Lag (ARDL) model is employed to scrutinize short- and long-term elasticities. The findings reveal a strong, statistically significant, positive correlation between money supply and inflation over the long term; specifically, a modest 1% increase in money supply leads to a significant 39.35% rise in the inflation rate. Additionally, in the long run, a sizeable negative relationship between GDP and inflation is uncovered, suggesting that a 1% rise in GDP corresponds to a remarkable 261.17% decrease in the inflation rate. Granger causality tests expose a unidirectional influence-from exchange rate to inflation, money supply to exchange rate, and GDP to exchange rate. Hence, this study emphasizes the need for the Somali government to implement fiscally prudent measures that foster real GDP growth.