Inflation, Monetary Policy and Globalization Nexus: A Panel data analysis

Abstract

Inflation, as major macroeconomic variable has always been an important area of research for socio-economic policy makers. For prudent policy formulation it is of vital importance to investigate the possible dimensions, through which it is generated. The aim of present study is to measure the impact of monetary policy and globalization on South and South East Asian inflation by utilizing the time span from 1981-2016. To examine the nature of globalization-inflation relationship the study utilized an updated measure of globalization. Moreover, the current study measures the impact of monetary policy variables on inflation, ignoring random shocks as these considered fewer fractions for the inconsistency of the policy instruments. The study also employed Hodrick Prescott filter to calculate the domestic output gap in order to assess that still changes in domestic output gap is relevant to inflation variation in the presence of globalization, hence refute the observation of flat Phillips curve that suggest the insignificant role of domestic output gap in the era of open economy. Estimating augmented Phillips curve model and employing structural modeling Panel data Mean Group(MG) and Pooled Mean Group(PMG) Estimation technique, the results of the study confirm that both global and domestic factors have significant and descriptive power for domestic inflation. Therefore, the monetary authorities of these countries should consider the developments in global conditions.