Financial Dimensions of Inflationary Pressure in Developing Countries: An In-depth Analysis of Policy Mix

Abstract

This study explores the relationship between inflationary pressure and policy mix in developing countries from 1995 to 2022. Money supply, unemployment rate, regulatory policies, currency rate, remittances, and amount of foreign debt are explanatory factors, whereas inflationary pressure is the dependent variable. Panel least squares and fixed effect models are utilized to assess the influence of these factors on inflation. The study's findings shed light on the complicated links between financial factors and inflationary pressures in developing nations. The study demonstrates that in developing countries, the money supply negatively and considerably influences inflation. The study found that unemployment had a favorable but insignificant effect on inflation pressures in emerging nations. Furthermore, the research demonstrates that regulatory measures negatively and considerably influence inflationary pressures. The exchange rate has been proven to positively and significantly impact inflationary pressures in emerging nations, highlighting the necessity of prudent exchange rate management in mitigating the inflationary implications of currency decline. Furthermore, remittances negatively and considerably influence inflationary pressures, implying that increasing financial inclusion and investment possibilities for remittance-receiving families might help stabilize inflation in developing countries. Finally, the study emphasizes that the quantity of foreign debt in emerging nations positively and considerably influences inflationary pressures. According to the study, careful monitoring and control of the money supply, addressing unemployment through labor market reforms and investments, implementing effective regulatory restrictions, prudent exchange rate management, promoting financial inclusion for remittance recipients, and pursuing sustainable debt levels are all important.