The Effect of Macroeconomic Variables on Inflation: A global Perspective

Abstract

The purpose of this study is to examine how macroeconomic factors affect the inflation rate in a few chosen nations across all continents of the earth except Antarctica. The data spans the years 1994–2023 and includes 54 nations. The study employed a dynamic panel difference Generalized Method of Moments (GMM) model because the majority of the variables are endogenous. As a robustness check for stationarity, the non-stationary variables were adjusted as needed. The findings indicate that macroeconomic factors such as real interest rates, broad money supply growth, and lagged (initial) inflation have statistically significant positive effects on inflation, while import growth and GDP per capita growth have statistically significant negative effects. Finally, the study employed the Granger Non-Causality Test to examine the directional causality between inflation and other macroeconomic variables. The test found that inflation has bidirectional causality with both economic growth and broad money supply growth. Consequently, policymakers have to duly understand the dynamic and causal relationships among these variables when designing macroeconomic policy interventions.