Title: The response of inflation to its determinants: does it differ at short and long horizons?

Authors: Abdul Rashid

Addresses: International Institute of Islamic Economics (IIE), International Islamic University (IIU), Room D-13, New Campus, Block 2, Islamabad, Pakistan

Abstract: Using an autoregressive distributed lag (ARDL) approach, this paper empirically analyses whether the response of inflation to its determinants differs at short and long horizons. The results from the bounds test provide evidence of the existence of a significant long-run relationship between national price levels and the variables included in the price model. The results relating to the short-run dynamics reveal that while the change in national price levels is positively related to increments in credit to private sector, the foreign reserve, and government spending, it is negatively linked with changes in the nominal interest rate and the exchange rate volatility. Interestingly, the analysis shows that the short-run positive effect of credit to private sector and the short-run negative effect of market interest rate on national price levels are totally reversed in the long run. Yet, the effect of government spending on inflation remains the same over both short and long horizons.

Keywords: inflation; interest rates; foreign reserves; exchange rate volatility; ERV; private sector credit; government spending; short horizons; long horizons; long-run estimates; bounds test; autoregressive distributed lag; ARDL; nominal interest rate.

DOI: 10.1504/IJEBR.2013.055543

International Journal of Economics and Business Research, 2013 Vol.6 No.2, pp.229 - 242

Published online: 30 Dec 2013 *

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