The response of inflation to its determinants: does it differ at short and long horizons?

Abstract

Using an autoregressive distributed lag (ARDL) approach, this paper empirically analyses whether the response of inflation to its determinants differs at short and long horizons. The results from the bounds test provide evidence of the existence of a significant long-run relationship between national price levels and the variables included in the price model. The results relating to the short-run dynamics reveal that while the change in national price levels is positively related to increments in credit to private sector, the foreign reserve, and government spending, it is negatively linked with changes in the nominal interest rate and the exchange rate volatility. Interestingly, the analysis shows that the short-run positive effect of credit to private sector and the short-run negative effect of market interest rate on national price levels are totally reversed in the long run. Yet, the effect of government spending on inflation remains the same over both short and long horizons.