Macroeconomic Determinants of Inflation And Cost of Living in Kazakhstan: A VECM Approach
DOI:
https://doi.org/10.2478/rsep-2025-0016Keywords:
Vector Error Correction Model (VECM), monetary policy, average monthly wages, construction price index, cost of livingAbstract
This study goes on to look at the dynamic relationships between inflation and some main macroeconomic variables considered in Kazakhstan, namely, building a framework around CPI, Average monthly wages, Construction price index, Cost of living index, and Official interest rate. Working mainly with monthly data, from 2011 to 2022, the aim was to establish long-run equilibrium relations and to understand short-term dynamics that influence inflation through VECM estimation. Unit root tests and cointegration checks gave adequate grounds for doing a VECM since the variables were found to be integrated of order one and cointegrated. IRFs reveal the strong and almost persistent reaction of CPI to interest rate shocks, while wage and construction cost shocks only display slow and moderate effects. Through FEVD, it becomes evident that CPI shocks remain mostly explained by themselves (61%), and interest rate shocks explain about one-third of its variations. Hence, the above-mentioned evidence highlights that monetary policy is crucial in controlling inflation, with structural cost factors coming in a bit later. Hence, policy formulation should institutionalize forward guidance and inflation-contingent budgeting in public infrastructure projects. This work would answer a small part in the huge empirical debate on the dynamics of inflation in Kazakhstan and would also provide input for macroeconomic stabilization policies.
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