An Examination on the Determinants of Inflation

Abstract

 Abstract—This paper examines factors affecting inflation in two groups of countries (high inflation group and low inflation group) using annual data from 1970 to 2011. An Error Correction Model based on the Autoregressive Distributed Lag (ARDL) modeling has been used to explain the short run and long run impacts of each variable on inflation. The results respectively indicate that GDP growth and imports of goods and services have the significant long run impact on inflation in low inflation countries. Results also indicate that money supply, national expenditure and GDP growth are the determinants of inflation which impose long run impact on inflation in high inflation countries. In the short run likewise, none of the variables is found to be significant determinants in high inflation countries. However money supply, imports of goods and services and GDP growth has significant relationship with inflation in low inflation countries.