Identifying factors affecting inflation rate in U.S.A. under four periods

Abstract

Inflation rate is a crucial variable on an economy. It is defined as a rise in an economy’s general price level across variety of sectors. There have been many economical theories on inflation. This paper examines influence of selected seven economical variables on inflation rate in U.S.A economy during four defined periods from first quarter of 1981 to fourth quarter of 2016. The four periods consists of two republican periods of 1981-1992 and 2001-2008 and two democratic periods of 1993-2008 and 2009-2016. Four vector error correction models are estimated and granger causality is tested to identify the short – run and long-run relationships between seven economical indicators and inflation. Foreign direct investment which has a negative influence on inflation rate which is contradictory to the relationship described in inflation theory. Other variables of exchange rate, gross domestic product, trade of balance, money supply, and government expenditure and unemployment rate have mixed influence on inflation rate in U.S.A economy. The study recommends that there are effects of selected economical variables on inflation rate in U.S.A and some aspects of the theories of inflation are applicable in U.S.A economy. Further scrutiny should be done to clear the ambivalent results of influence of other variables on inflation rate.