Investigating the Determinants of Inflation: A Panel Data Analysis

Abstract

Maintaining price stability is the main objective of central banks all over the world. Each central bank requires a unique monetary policy rule as the characteristics and structure of each economy is idiosyncratic. Economic diversities necessitate special efforts, however, theories emerged from former experiences worldwide led to generalizations of some monetary policies neglecting the differences between industrialized and emerging economies. This paper studies how inflation rates of inflation targeting (IT) and non-inflation targeting (non-IT) emerging and industrial economies are affected with the determinants as money growth, real effective exchange rate, budget balance, GDP growth, real wages and output gap using static and dynamic panel data analysis for the period 2002-2012. Decomposing the determinants of inflation rate enables to investigate the existence of several transmission mechanisms for emerging and industrial economies.