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Financial determinants of consumer price inflation. What do dynamics in money, credit, efficiency and size tell us?

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  • Simplice A, Asongu

Abstract

Purpose – The purpose of this paper is to examine the effects of financial dynamic policy options in money, credit, efficiency and size on consumer prices. Soaring food prices have marked the geopolitical landscape of developing countries in the past few years. Design/methodology/approach – The estimation approach used is a Two-Stage-Least Squares Instrumental Variable technique. Instruments include: legal-origins; income-levels and religious-dominations. The first-step consists of justifying the choice of the estimation approach with a Hausman-test for endogeneity. In the second-step, we verify that the instrumental variables are exogenous to the endogenous components of explaining variables(financial dynamic channels) conditional on other covariates(control variables). In the third-step, the validity of the instruments is examined with the Sargan overidentifying restrictions test. Robustness checks are ensured by: (1) use of alternative indicators of each financial dynamic; (2) estimation with robust Heteroscedasticity and Autocorrelation Consistent(HAC) standard errors; and (3) adoption of two interchangeable sets of instruments. Findings – Findings broadly reveal the following: (1) money(depth) and credit(activity) which are in absolute measures have positive elasticities of inflation; while (2) financial efficiency and size in relative measures have negative elasticities of inflation. Social implications – This paper helps in providing monetary policy options in the fight against soaring consumer prices. By keeping inflationary pressures on food prices in check, sustained campaigns involving strikes, demonstrations, marches, rallies and political crises that seriously disrupt economic performance could be mitigated. Originality/value – As far as we have perused, there is yet no study that assesses monetary policy options that could be relevant in addressing the dramatic surge in the price of consumer commodities.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36175.

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Date of creation: 25 Jan 2012
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Handle: RePEc:pra:mprapa:36175

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Keywords: Banks; Inflation; Development; Panel; Africa;

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  1. Simplice A., Asongu, 2011. "Law and finance in Africa," MPRA Paper 34080, University Library of Munich, Germany.
  2. Simplice A., Asongu, 2011. "New financial intermediary development indicators for developing countries," MPRA Paper 30921, University Library of Munich, Germany.
  3. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(3), pages 477-496, December.
  4. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  5. Simplice A., Asongu, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," MPRA Paper 33868, University Library of Munich, Germany.
  6. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law and Finance: why Does Legal Origin Matter?," NBER Working Papers 9379, National Bureau of Economic Research, Inc.
  7. Ravallion, Martin & Lokshin, Michael, 2004. "Gainers and losers from trade reform in Morocco," Policy Research Working Paper Series 3368, The World Bank.
  8. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  9. repec:oup:wbrobs:v:25:y:2009:i:1:p:157-176 is not listed on IDEAS
  10. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 221-248, April.
  11. Simplice A., Asongu, 2011. "Law and Investment in Africa," MPRA Paper 34700, University Library of Munich, Germany.
  12. Asongu Simplice, 2011. "Why do French civil-law countries have higher levels of financial efficiency?," Working Papers 11/011, African Governance and Development Institute..
  13. Quentin Wodon & Hassan Zaman, 2010. "Higher Food Prices in Sub-Saharan Africa: Poverty Impact and Policy Responses," World Bank Research Observer, World Bank Group, World Bank Group, vol. 25(1), pages 157-176, February.
  14. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  15. Ivanic, Maros & Martin, Will, 2008. "Implications of higher global food prices for poverty in low-income countries," Policy Research Working Paper Series 4594, The World Bank.
  16. Simplice A., Asongu, 2011. "Law, Finance and Investment: does legal origin matter?," MPRA Paper 34698, University Library of Munich, Germany.
  17. Piesse, Jenifer & Thirtle, Colin, 2009. "Three bubbles and a panic: An explanatory review of recent food commodity price events," Food Policy, Elsevier, Elsevier, vol. 34(2), pages 119-129, April.
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