Identifying Factors Affecting Inflation Rate in U.S.A under Different Scenarios Sri Lankan Journal of Banking and Finance
Abstract
Inflation is the rise of the price level of an economy and inflation influences consumer behavior and it is important in driving economic growth. The aim of this study is to identify if there is a significant difference between the economic theories related to the inflation rate and behavior of economic variables in the USA economy according to the different political phases in the country. In order to identify the gap between theories and practices in economics in the USA, eight economics variables are selected and secondary data is collected from 1981 to 2016. Four vector error correction models are estimated and granger causality is tested to identify the long-run and short-run relationships between economic variables and inflation. Portmanteau tests for autocorrelation, Serial correlation LM have been used to confirm the stability and validity of VEC models. Foreign direct investment shows a negative impact on the inflation rate during four periods. The exchange rate, money supply, balance of trade, and the unemployment rate have a relationship with the inflation rate in accordance with the theories during the economic expansion periods. Gross domestic product and government expenditure have mixed influence on the inflation rate in the US economy; therefore, they do not indicate any pattern of behavior with the inflation rate. This study shows that the economic theories might be altered with strategic economic decision-making. Therefore, it shows the importance of an independent institute, which actively introduces effective strategic policies to maintain the economy of a country, regardless of the existing political situation.
Citation : Illukkumbura, Anusha & Peris, TSG. (2021). Identifying Factors Affecting Inflation Rate in U.S.A under Different Scenarios, Sri Lankan Journal of Banking and Finance . 10.13140/RG.2.2.16969.47202.