What Drives Inflation in MENA Countries?

Abstract

This paper assesses the impact of both monetary and non-monetary determinants of inflation for a sample of 8 MENA countries over the period 1980-2009. We carried out different model estimations to examine the impact of five mainstream variable groups on inflation namely structural, business-cycle-related, openness-related and external and monetary variables. To control for robustness of our results, we used alternative estimation techniques, mainly system GMM. Estimation results report strong evidence on the existence of persistent inflation dynamics in these countries. With regards to the world inflation and nominal effective exchange rate, they produce significant and positive effects on inflation. Our empirical findings also report a negative effect of the output gap on inflation. The effect produced by government spending is however surprisingly negative. A last set of regressions suggests a potential explanation for this result: the effect produced by the output gap reflects the effects of both fiscal and monetary policy on inflation. That is a decrease in government spending over a long period enhances growth, reduces the output gap and generates inflation, whereas an increase in money supply produces inflation by enhancing growth and reducing the output gap.

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