The Influence of Political Stability, Money Supply, and Trade Deficit on Inflation in ASEAN Countries

Abstract

This paper examines the long-run and short-run effects of money supply, trade deficit, and political stability on inflation across nine ASEAN countries from 2000 to 2019. Using a panel ARDL framework, we estimate the Pooled Mean Group (PMG) estimator for both the upper-middle-income subgroup (N = 5) and the full panel (N = 9). All variables are transformed using the inverse hyperbolic sine (ASINH) function to accommodate negative values. Unit root tests confirm I (1) integration for all variables, while Pedroni and Kao cointegration tests establish a stable long-run relationship. In the long run, the trade deficit exerts a positive and significant effect on inflation, whereas political stability consistently reduces inflation across all estimated groups. Additionally, money supply is positively and significantly associated with inflation in both groups. We also conducted Granger causality tests, which revealed primarily a unidirectional causal relationship from money supply to inflation, along with a bidirectional relationship between political stability and inflation. These findings underscore the importance of institutional quality and trade balance management for achieving inflation stability in ASEAN economies.