Roles of Fiscal, Monetary and Governance Factors upon Inflation: Outcomes from Panel Data Analysis

Abstract To date, there has been a long-term debate between the monetarists and Keynesian schools on the elements of inflation in countries, whether monetary or fiscal. Over the years, with the advent of the political economics and the governments’ active participations to the economic and social activities, a new factor, among others, in the name of good governance – say, controlling the corruption level – has arisen as the decider of inflation in countries. This study aims to examine empirically whether money supply, government expenditure (both capital and revenue) and corruption do maintain any long-run associations and short-run dynamics with inflation for the panel of the world’s 20 leading countries. The results reveal a long-run association between the fiscal, monetary, and governance variables, and inflation; and in the short run, there are causal influences from total government expenditure, money supply and corruption to inflation in developed countries, but capital and revenue expenditures, money supply and corruption cause inflation in developing countries.