Understanding Inflation Dynamics in Afghanistan

Over the past two decades, Afghanistan experienced three main periods of deflation, with the lastest being the longest. This paper investigates the macroeconomic factors influencing inflation dynamics in the short and long run, considering both domestic and external factors. Utilizing quarterly data and employing Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) methodologies, the paper finds that the exchange rate is the primary long-term price driver due to Afghanistan's reliance on imports and foreign aid, followed by money supply and international commodity prices. In the short run, inflation is persisent, and broad money have a significant impact on inflation compared to external factors.