Inflation dynamics in the Maldives : research and policy notes

Abstract

The paper examines the factors that drive inflation in the Maldives, with a focus on the relationship between the exchange rate and inflation. Using cointegration and error correction techniques on monthly data from January 1990 to December 2010, the results show that the exchange rate pass through is extremely high in the long run. The long run analysis also demonstrated the neutrality of money in the sense that an increase in money supply leads to an almost proportionate increase in the price level over time. While some degree of price stickiness was found to exist in the short run, the results support the theory of absolute Purchasing Power Parity in the longer run.