The Nonmonetary Determinants of Inflation: A Panel Data Study

Abstract

This paper explains inflation performance in a sample of industrial and transition economies by looking at policymakers` incentives to inflate the economy, and the perceived costs of disinflation. It finds a significant effect of fiscal deficits on inflation, particularly (but not exclusively) in countries where the government securities market is not well developed. Other factors with significant effect on inflation include relative price changes, central bank independence, the exchange rate regime, and the degree of price liberalization; there is only limited evidence that other structural factors, such as those influencing the natural rate of unemployment, have a significant effect on inflation.

Keywords: inflation, fiscal policy, panel data

JEL Classification: E31, E42, E63