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Sources of Inflation in Developing Countries

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  • Prakash Loungani
  • Phillip Swagel

Abstract

This paper develops stylized facts about the inflation process in developing countries, focusing particularly on the relationship between the exchange rate regime and the sources of inflation. Using annual data from 1964 to 1998 for 53 developing countries, we find that money growth and exchange rate changes-factors typically related to fiscal influences-are far more important in countries with floating exchange rate regimes than in those with fixed exchange rates. Instead, inertial factors dominate the inflation process in developing countries with fixed exchange rate regimes.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/198.

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Length: 29
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/198

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Related research

Keywords: Developing countries; Exchange rate regimes; inflation; exchange rate; money growth; exchange rates; exchange rate regime; fixed exchange rate; inflation equation; fixed exchange rate regimes; floating exchange rate; average inflation; inflation money; exchange rate changes; floating exchange rate regimes; flexible exchange rate; exchange rate movements; exchange rate shocks; increase in inflation; fixed exchange rate regime; rates of inflation; flexible exchange rate regimes; high inflation; fixed exchange rates; real exchange rate; real exchange rates; low inflation; inflation process; nominal exchange rate; flexible exchange rate regime; inflationary expectations; exchange rate depreciation; floating exchange rate regime; inflation rates; price level; inflation ? money; real exchange rate fluctuations; nominal variables; average rate of inflation; rate of inflation; effective exchange rate; nominal exchange rates; currency pegs; relative price; exchange rate pegs; nominal effective exchange rate; macroeconomic performance; inflationary policy; floating exchange rates; money supply; average exchange rate; inflation rate; price stability; inflation dynamics; inflation response; exchange rate fluctuations; high-inflation episodes; exchange rate peg; monetary economics;

References

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  1. Peter J. Montiel, 1989. "Empirical Analysis of High-Inflation Episodes in Argentina, Brazil, and Israel," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 527-549, September.
  2. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  3. Loungani, P. & Eazin, A. & Yuen, C.W., 1996. "Capital Mobility and the Output-Inflation Tradeoff," Papers 38-96, Tel Aviv.
  4. Ball, Laurence & Mankiw, N Gregory, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 161-93, February.
  5. C. John McDermott & David T. Coe, 1996. "Does the Gap Model Work in Asia?," IMF Working Papers 96/69, International Monetary Fund.
  6. Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  7. Prakash Loungani & Phillip Swagel, 1995. "Supply-side sources of inflation: evidence from OECD countries," International Finance Discussion Papers 515, Board of Governors of the Federal Reserve System (U.S.).
  8. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  9. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc.
  10. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  11. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  12. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  13. Gary G. Moser, 1995. "The Main Determinants of Inflation in Nigeria," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 270-289, June.
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Citations

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Cited by:
  1. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
  2. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, EconWPA.
  3. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  4. Paul R. Masson & Xavier Debrun & Catherine A. Pattillo, 2002. "Monetary Union in West Africa," IMF Working Papers 02/226, International Monetary Fund.
  5. Mijiyawa, Abdoul, 2008. "Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable," Proceedings of the German Development Economics Conference, Zurich 2008 28, Verein für Socialpolitik, Research Committee Development Economics.
  6. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: cross-country evidence," CSAE Working Paper Series 2005-08, Centre for the Study of African Economies, University of Oxford.
  7. Mohamed A. Osman & Rosmy Jean Louis & Faruk Balli, 2009. "Output gap and inflation nexus: the case of United Arab Emirates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 1(1), pages 118-135.
  8. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Working Papers 03-17, Bank of Canada.
  9. Uma Ramakrishnan & Athanasios Vamvakidis, 2002. "Forecasting Inflation in Indonesia," IMF Working Papers 02/111, International Monetary Fund.
  10. Ilker Domac & Eray M. Yucel, 2003. "What Triggers Inflation in Emerging Market Economies?," Working Papers 0307, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  11. International Monetary Fund, 2008. "Fiscal and Monetary Anchors for Price Stability," IMF Working Papers 08/121, International Monetary Fund.
  12. Grand Nathalie & Dropsy Vincent, 2005. "Exchange Rate And Inflation Targeting In Morocco And Tunisia," Macroeconomics 0507018, EconWPA.

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