Abstract
Purpose This study aims to examine the influence of socioeconomic development on inflation in South Asia using the foreign exchange rate and money supply as control variables. Design/methodology/approach The study uses annual panel data for five South Asian economies, namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka over the period 1990–2018, applies cointegrating regression techniques, namely, the panel dynamic ordinary least square (OLS) and fully modified OLS estimators to examine the long-run relations and conducts the Toda-Yamamoto Granger causality test to detect the direction of causality among variables. Findings The cointegrating regression estimations have documented that the socioeconomic development proxied by the human development index (HDI) has no significant impact on inflation. Although economic development represented by gross domestic product (GDP) growth causes inflation, socioeconomic development represented by HDI has no impact on inflation and has demonstrated as a better macroeconomic indicator, and thus creates no inflationary pressure in the economy. The foreign exchange rate has a positive impact on inflation. The broad money supply has the usual positive effect on domestic inflation that endorses the monetarist view about prices. The Toda-Yamamoto Granger causality test has confirmed several unidirectional causalities: inflation causes HDI, money supply causes both inflation and HDI and the foreign exchange rate causes HDI. Practical implications The study has practical implications for policymakers in South Asia, to improve HDI, particularly GDP per capita, education and health-care facilities to realize continuous socioeconomic development, which will take care of inflation. Moreover, these counties may follow a conservative monetary policy to control inflationary pressure in their economies. Originality/value The study is original and claims to be the first to examine the impact of socioeconomic development on inflation. The findings have socioeconomic values regarding controlling inflation in South Asia.
Highlights
Economic development refers to the growth in national income accompanied by desired changes in social dimensions
This study aims to examine the impact of human development index” (HDI), a proxy for socioeconomic development on inflation incorporating two more control variables, e.g. foreign exchange rate (FEXR) and money supply, as they are believed to have a significant impact on inflation
4.1 Panel unit root test results The result of the cross-section dependence (CD) test developed by Pesaran (2004) is summarized in Table 3, show that all the cross-sections are correlated across panel groups at the 1% significance level
Summary
Economic development refers to the growth in national income accompanied by desired changes in social dimensions. Economic indicators such as real gross national product and gross domestic product (GDP) are used to quantify economic development that has several limitations. Those limitations have led to social measures of economic development that indicate countries’ preferences toward their resource allocation among alternate uses. One such measure is the “human development index” (HDI), which is a blend of economic and social indicators and comprises GDP per capita, literacy and health. This study considers HDI as a proxy for socioeconomic development that incorporates social indicators with an economic indicator as pointed out
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