The influence of inflation, volatility of inflation and imports on investment: A panel data approach

Abstract

The paper investigates the response of the share of domestic investment in GDP to changes in the level of inflation rate, the volatility of inflation rate and the ratio of imports to GDP using panel data analysis for a sample of Central and East European countries and for the period of 1995-2003. The choice of correct specification of the econometric model for each panel regression is based on the results of specification tests that include Hausman, Lagrange Multiplier and F tests. The main findings are the following: 1) Both the level of inflation rate and its volatility have exerted negative effects on the share of domestic investment in GDP. Even though the estimated effects are statistically significant, they can be characterized as 'economically weak'. 2) The estimated effect of the ratio of imports to GDP is both highly significant in statistical sense and also economically strong. © Serhan Ciftcioglu, Nermin Begovic, 2007.