Inflation Dynamics: A Comprehensive Analysis of Key Determinants Using Panel Data

Abstract

A comprehensive analysis is performed on the relationship between key macroeconomic variables and the inflation rate, with particular emphasis on the effects of money supply growth, economic growth, and the levels of imports and exports across 39 countries. The aim is to provide empirical insights into the factors influencing inflation dynamics and to enhance understanding of their varying impacts in different national contexts. The investigation covers 5 Latin American countries, 2 Western Balkan countries, 13 European countries, 8 Asian countries, 11 African countries, and Australia, spanning a 23-year period from 2000 to 2023. The econometric techniques used for this investigation include Ordinary Least Squares (OLS), Fixed and Random Effects Regression, and Generalized Method of Moments (GMM) for dynamic panel data. The study finds that inflation persists over time, with broad money supply being the most significant predictor, particularly in Latin America and developing regions. Economic growth and trade factors have varying effects, with imports reducing inflation and exports lowering inflation more in Europe and Asia, while regional differences show higher inflation volatility in Latin America and Africa. Building on these findings, it is imperative to manage the money supply rigorously in developing regions, prioritize export-driven trade policies in Europe and Asia, and implement robust counter-cyclical measures in countries experiencing growth-related inflation. Effective inflation control demands tailored, region-specific strategies that address the unique economic challenges of each area.