Domestic and External Drivers of Inflation in Oil Importing Developing Countries

This paper explores inflation drivers in 12 oil-importing developing economies, focusing on domestic and external drivers, such as monetary policy rate, government expenditure, global oil prices, exchange rate, imports, global food prices, and other factors. The study aims to establish a hierarchy of these drivers from the most to the least significant, which is essential for a better implementation of anti-inflationary policies in oil-importing developing countries. Using Seemingly Unrelated Regression (SUR) model and second-generation panel unit root test to handle cross-sectional dependence, and applying Dumitrescu-Hurlin panel Granger causality approach to confirm SUR outcomes, this research paper revealed for the period between 2000Q1, and 2023Q2 that lagged inflation is the most important driver of current inflation, supporting the theoretical concept of inertial inflation. Unexpectedly, this study showed that monetary policy rate is positively impacting inflation, confirming the presence of the price puzzle. Additionally, monetary base doesn't have any significant impact on aggregate price level, meaning that the inflation is not a monetary phenomenon for the studied countries. Producer prices, used as a proxy for domestic supply shocks, seemed to have a positive and significant effect on inflation. Government expenditure, trade openness, and global oil prices have notable effects. Even if all the studied countries are oil importers, the impact of oil prices on inflation is mitigated by subsidies and price controls. Finally, inflation is negatively affected by imports and exchange rate. The study underscores the necessity for new central bank tools adapted to these countries context, monetary and fiscal policies coordination, a strategic use of subsidies, and an integrated policy to improve market competition.