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Drivers of Inflation in the Economy of Bahrain

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  • Ibrahem H. Al-Ezzee

Abstract

The study tries to recognize the macroeconomic variables responsible for inflation in Bahrain during the period 1980-2010. For this purpose, co-integration test were used in the empirical analysis. Using Augmented Dickey-Fuller (ADF) Phillips Perron (PP) tests, the variables of the study revealed to be integrated of the order one 1(1) at first difference. Cointegration test was used to state the existence or otherwise of a cointegrating vector in the variables. Trace and Maximum Eigen test value point out co-integration at 5% level of significance pointing to the fact that the variables have a long-run relationship. The paper found that inflation in the short-run is effected by M2, GEXP, and WACPI supporting the long run analysis. The signs of NEER and IR are not as expected. The error correction term is negative and significant at 1%, so the model is stable and supporting the Co-integration results. The variance decompositions (VDs) approach is used to capture the relative importance of various shocks and their influences on our variable of inflation. The relative variance of inflation is due the exchange rate and interest rate. The results show that shocks to the CPI itself, Nominal Effective Exchange Rate NEER, Nominal Interest Rate NIR, M2, Government Expenditure GEXP, and Consumer Price Index of Main Partners WACPI over all horizons.

Suggested Citation

  • Ibrahem H. Al-Ezzee, 2016. "Drivers of Inflation in the Economy of Bahrain," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(3), pages 178-188, March.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:3:p:178-188
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    References listed on IDEAS

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    Cited by:

    1. Nyoni, Thabani, 2019. "Predicting inflation in the Kingdom of Bahrain using ARIMA models," MPRA Paper 92452, University Library of Munich, Germany.

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    More about this item

    Keywords

    broad money supply M2; Consumer Price Index (CPI) and Consumer Price Index of Main Partners (WACPI); Government expenditure (GEXP); Nominal Effective Exchange Rate (NEER); and Nominal Interest Rate (NIR);
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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