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Determinants of Inflation in Azerbaijan

Author

Listed:
  • Vugar Rahimov

    (Central Bank of Azerbaijan Republic)

  • Shaig Adigozalov

    (Central Bank of Azerbaijan Republic)

  • Fuad Mammadov

    (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.

Suggested Citation

  • Vugar Rahimov & Shaig Adigozalov & Fuad Mammadov, 2016. "Determinants of Inflation in Azerbaijan," Working Papers 1607, Central Bank of Azerbaijan Republic.
    • Handle: RePEc:aze:wpaper:1607
    as

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    References listed on IDEAS

    as
    1. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    2. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
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    7. Fakhri, Hasanov & Khudayar, Hasanli, 2011. "Why had the Money Market Approach been irrelevant in explaining inflation in Azerbaijan during the rapid economic growth period?," MPRA Paper 29559, University Library of Munich, Germany.
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    10. Huseynov, Salman & Ahmadov, Vugar & Adigozalov, Shaig, 2014. "Beating a Random Walk: “Hard Times” for Forecasting Inflation in Post-Oil Boom Years?," MPRA Paper 63515, University Library of Munich, Germany.
    11. Mr. Stanley Fischer & Ms. Ratna Sahay & Mr. Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 2002/197, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nijat Guliyev, 2018. "The effects of external shocks on Azerbaijan economy," Working Papers 1802, Central Bank of Azerbaijan Republic.
    2. Khatai Aliyev & Sugra Humbatova & Natig Hajiyev Gadim-Oglu, 2023. "How Oil Price Changes Affect Inflation in an Oil-Exporting Country: Evidence from Azerbaijan," Sustainability, MDPI, vol. 15(7), pages 1-11, March.
    3. Niftiyev, Ibrahim, 2020. "Determinants of the Agricultural Exports in Azerbaijan," EconStor Preprints 226347, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    consumer price index; inflation; determinants of inflation; historical decomposition; developing country; structural vector autoregression;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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