What Drives Inflation in OIC Economies? A Fixed-Effects Panel Approach

Abstract

This research looks into the factors that influence inflation by investigating the impact of broad money supply, crop production index, GDP growth, gross capital formation, and electricity production from oil and gas, along with the imports and exports of goods and services on inflation in Organization of Islamic Cooperation 13 countries for the years 1990 to 2022. The data structured as a panel is collected from the World Bank, and according to the Hausman test (p < 0.05), the fixed-effects model is determined to be the most fitting estimation technique. The empirical evidence reveals that while trade openness (TO) and investment (INV) have a negative correlation with inflation when considered separately, their combined effect (TO×INV) produces a positive and significant influence, signifying that the countries where both trade and investment are growing are likely to see an increase in price levels. It implies that though trade and investment can separately be relied upon for inflation stabilization, their joint link can create demand pressures or structural weaknesses that drive up inflation. The implications of such studies require traders to be highly aware and thus tailor their operations to the movements of the economy when opening up the market. Such is the case with inflation; thus, it should not just be treated as an economic issue requiring intervention only if monetary policy is involved, but rather a combination of policies should be considered.