Determinants of Inflation in Azerbaijan

Vugar Rahimov, Shaig Adigozalov () and Fuad Mammadov ()
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Shaig Adigozalov: Central Bank of Azerbaijan Republic

No 1607, Working Papers from Central Bank of Azerbaijan Republic

Abstract: This paper assesses the main determinants of inflation in Azerbaijan during 2003-2015 years. Using quarterly data on CPI, trade partner’s CPI, nominal effective exchange rate (NEER), money supply (M2), real non-oil gross domestic product (NGDP) and credits we employ vector auto regression (VAR) analysis in order to conduct our study. Impulse response and variance decomposition analysis suggest that inflation is mostly explained by foreign inflation, fiscal policy, exchange rate and own shocks. Whereas monetary policy and supply shocks do not play any essential role in explaining inflation. Among these variables inflation expectations, foreign inflation and monetary policy (credit variable) have quick effect on domestic headline inflation, whereas the effect of fiscal variable is relatively slower: it takes two quarters to fully reflect on prices. We also find that appreciation of exchange rate has deflationary effect on domestic inflation.

Keywords: consumer price index; inflation; determinants of inflation; historical decomposition; developing country; structural vector autoregression (search for similar items in EconPapers)
JEL-codes: E31 E50 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2016-10-12
New Economics Papers: this item is included in nep-cwa, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:aze:wpaper:1607

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