The determinants of inflation in Kuwait : an empirical investigation

Abstract EN

We conduct empirical analysis of the main factors influencing inflation in Kuwait.

The State of Kuwait is representative of small open economy facing capital mobility.

Due to the lack of well-developed domestic financial market and domestic investment opportunities a model of price determination is developed and tested based on supply-side constraints, demand pressures, and spillovers from external factors, as well as the role of second-round effects and entrenched expectations on price adjustments.

The main finding useful for the conduct of monetary policy in Kuwait is that money supply, domestic and foreign interest rates, the exchange rate, and world prices are the main determinants of consumer prices in Kuwait.

Exchange rate pass-through and money supply shocks come up as the foremost factor and predominates in the inflationary process.