The Causal Relationship Between Export, Import and Harmonized Consumer Price Index: Evidence from Kosovo

Abstract

The purpose of this paper is to analyze the causal relationship between export, import, and inflation for Kosovo which is a developing country. Pointedly, we examine empirically this relationship by deliberating that export and import influence the harmonized consumer price index, which is expressed as the inflation rate. This paper employs time series monthly data for the period 2010-Jan to 2020-Dec extracted from Kosovo’s Agency of Statistics. Since these variables were stationary at different levels, we have integrated the Toda-Yamamoto approach to Granger causality. The proposed model was free of autocorrelation and no root lied outside the unit circle indicating that the model is stable. The results of Granger causality revealed that export causes import and import causes export, export does not cause inflation, and inflation does not cause export. However, import caused inflation, and inflation caused import. Henceforth, we have performed the Impulse Response Function to analyze the interaction between variables in a vector autoregressive model and we have performed variance decomposition to check the variability in the dependent variable lagged by its variance. The study is spectacled that import is the main vehicle of economic development of Kosovo and for this reason, import causes inflation rate. The results of this study imply that the Kosovar government should take measures to control the effect of imports on increasing of consumer prices.

Received: 28 September 2021 / Accepted: 16 February 2022 / Published: 5 May 2022