Impact of Residual Factor and Institutional Quality on Potential Inflation

The significant difference between the growth rate of liquidity and the rate of economic growth creates a kind of inflationary potential in the economy. Part of this difference occurs as overt inflation, but the other part will remain latently as potential inflation in the economy. Potential inflation should have appeared in the economy but was delayed, and this could cause inflation shock and inflationary uncertainty in the country's economy. Therefore, potential inflation is one of the main problems of any country that the fear of bursting and its occurrence causes instability and economic turmoil. The uncertainty resulted leads to huge bewilderment of investors and to reduced investment and employment. Residual factor and institutional quality is one of the factors affecting potential inflation. Because, with the improvement of the Residual factor, the appropriate institutional quality and the high rule of law and order, the concerns related to the growth of liquidity are eliminated. In this case, the growth of liquidity is commensurate with the economic growth and more growth in liquidity than economic growth is prevented. The purpose of this study is to investigate the effect of residual factor and institutional quality on the potential inflation of selected countries rich in natural resources for the period 1996-2019 using the fully modified ordinary least squares (FMOLS) method. The results of this study indicate that the variables of residual factor, institutional quality and exchange rate have a negative and significant effect on potential inflation. Also, according to the research results, the variable of government spending has a positive and significant effect on potential inflation.