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Sources of Inflation in Developing Countries

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  • Prakash Loungani
  • Phillip L 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.

Suggested Citation

  • Prakash Loungani & Phillip L Swagel, 2001. "Sources of Inflation in Developing Countries," IMF Working Papers 01/198, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:01/198
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    1. repec:eee:inteco:v:151:y:2017:i:c:p:71-84 is not listed on IDEAS
    2. Ilker Domaç & Eray M. Yücel, 2005. "What Triggers Inflation in Emerging Market Economies?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 141-164, April.
    3. Temitope Leshoro & Umakrishnan Kollamparambil, 2016. "Inflation Or Output Targeting? Monetary Policy Appropriateness In South Africa," PSL Quarterly Review, Economia civile, vol. 69(276), pages 77-104.
    4. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    5. Davide Furceri & Prakash Loungani & John Simon & Susan M. Wachter, 2016. "Global food prices and domestic inflation: some cross-country evidence," Oxford Economic Papers, Oxford University Press, vol. 68(3), pages 665-687.
    6. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    7. International Monetary Fund, 2006. "Indonesia; Selected Issues," IMF Staff Country Reports 06/318, International Monetary Fund.
    8. International Monetary Fund, 2008. "Fiscal and Monetary Anchors for Price Stability; Evidence from Sub-Saharan Africa," IMF Working Papers 08/121, International Monetary Fund.
    9. Anh D.M. Nguyen & Jemma Dridib & Filiz D. Unsal & Oral H. Williams, 2017. "On the drivers of inflation in Sub-Saharan Africa," International Economics, CEPII research center, issue 151, pages 71-84.
    10. Grand Nathalie & Dropsy Vincent, 2005. "Exchange Rate And Inflation Targeting In Morocco And Tunisia," Macroeconomics 0507018, EconWPA.
    11. Oluwole Alfred Olatunji, 2010. "The impact of oil price regimes on construction cost in Nigeria," Construction Management and Economics, Taylor & Francis Journals, vol. 28(7), pages 747-759.
    12. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
    13. Choi, Sangyup & Furceri, Davide & Loungani, Prakash & Mishra, Saurabh & Poplawski-Ribeiro, Marcos, 2018. "Oil prices and inflation dynamics: Evidence from advanced and developing economies," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 71-96.
    14. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, EconWPA.
    15. 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.
    16. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    17. Xavier Debrun & Paul Masson & Catherine Pattillo, 2005. "Monetary union in West Africa: who might gain, who might lose, and why?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 454-481, May.
    18. Julien Pinter, 2017. "Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support," Documents de travail du Centre d'Economie de la Sorbonne 17055, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    19. 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.
    20. Marco Terrones & Luis Catão, 2001. "Fiscal Deficits and Inflation; A New Look at the Emerging Market Evidence," IMF Working Papers 01/74, International Monetary Fund.
    21. Uma Ramakrishnan & Athanasios Vamvakidis, 2002. "Forecasting Inflation in Indonesia," IMF Working Papers 02/111, International Monetary Fund.
    22. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Staff Working Papers 03-17, Bank of Canada.

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    Keywords

    Developing countries; Exchange rate regimes; Inflation; exchange rate; money growth; exchange rates;

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