The effect of the inflation rate on gross domestic product: an economic analysis for the Western Balkans countries

Abstract

Background: One of the key indicators of a country's macroeconomic stability is certainly inflation. During the past year, there has been a general increase in inflation in Europe. The question arises as to how inflation affects other relevant indicators of the stability of a country. One of the most important indicators is gross domestic product.

Purpose: This paper analyses the effect of the inflation rate on gross domestic product in the countries of the Western Balkans for the period 2006-2021, which includes the initial period of the emerging health crisis.

Study design/methodology/approach: Official data from the World Bank was used to review the analysis of the state of inflation and gross domestic product. The same data was transformed into appropriate logarithms for proper econometric modelling. The methodology used to determine the effect of the inflation rate on the gross domestic product is multiple regression analysis with the ordinary least squares estimation method.

Findings/conclusions: The results of the analysis indicate a positive effect of the gross domestic product deflator on economic growth in the sample countries, while the impact of inflation measured according to the consumer price index is not significant.

Limitations/future research: Recommendations for decision-makers about inflation targeting, and further methodological approaches are given as part of the research conclusions.