Impact of Money Supply and External Debt on Inflation: A Panel ARDL Analysis from SAARC Countries

Abstract

Inflation has appeared as a crucial and persistent challenge to sustainable development across many developing countries, making unemployment worse, increasing poverty, and deteriorating the financial stability of the economies. Inflation involves an increase in the cost of consumer commodities and erodes purchasing power, predominantly upsetting poor populations, and can intensify poverty levels due to the higher cost of goods. It has been observed a sustained rise in the overall prices of goods has been observed in diverse SAARC countries. Considering the significance of this emerging issue, our research has focused on the major factors causing inflation in the SAARC countries. We have used data from 1991 to 2021 for the analysis. ARDL results show that in the long run, money supply, imports, external debt, and urban population have caused high inflation in SARC countries. However, money supply, external debt, and urban population resulted in high inflationary pressure in the short run in these countries. Our study recommends the money supply management in these countries. Moreover, there should be control over external debt and imports of the products. The focus should be more on export promotion strategies rather than import substitution strategies. Finally, there is a dire need to control the urban population in SAARC countries.