The Relationship between Liquidity Growth and Inflation: Role of Import in Oil Exporting Countries

This study investigates whether the increase in imports in oil countries (due to oil revenues) can mitigate the inflationary effect of liquidity growth or not. In this regard, a panel ARDL model is used to investigate the issue among 14 oil-exporting countries between 1970 and 2020, which is estimated by the Pooled Mean Group (PMG) method. According to the results of estimations, the effect of liquidity growth on inflation is positive and significant in the oil countries (both in the short and in the long run). The results show that increases in the ratio of imports reduce the effect of liquidity growth on inflation both in the short and the long run. Also, raising the oil revenues decrease the inflationary effect of liquidity growth in the long run. In other words, an increase in the supply of imported goods (because of a boom in oil revenues) leads to an increase in domestic money demand and partially neutralizes the inflationary effect of liquidity growth. Besides the panel regression, a regression analysis of Iranian economy data is used to test the hypothesis. These results also confirm that changes in the import ratio and oil income ratio explain the difference in liquidity growth and inflation.