Inflation Determinants in Argentina (2004-2022)

TL;DR

This paper investigates the key factors influencing inflation in Argentina from 2004 to 2022, employing a theoretical framework and advanced econometric methods to identify short- and long-term determinants.

Contribution

It introduces a theoretical approach to select relevant variables for inflation analysis, enhancing understanding of Argentina's inflation dynamics over an extended period.

Findings

Inertial component significantly influences short-term inflation.

Exchange rate and interest rate are crucial in short-run inflation dynamics.

Long-term inflation is linked to prices, interest rate, and economic activity.

Abstract

This paper analyzes the empirical relationship between the inflation rate and its proximate determinants in Argentina, using quarterly data over the period 2004-2022 and an error-correction vector model approach. Unlike previous literature, this paper uses a theoretical framework to motivate the inclusion of variables that are expected to contribute to explain inflation, thus reducing the risk of omitting relevant variables and formalizing key mechanisms. Inference is performed through Granger causality analysis, impulse response functions and forecast errors variance decomposition. The results suggest that an anti-inflationary plan for Argentina should take into consideration both the greater relevance of the inertial component, the exchange rate and the interest rate in the short-run dynamics of the price level, and the long-run relationship between prices, interest rate and activity level.