The effect of inflation on poverty in developing countries: A panel data analysis

ABSTRACT - The aim of this thesis is to study the effect of inflation on poverty in developing countries. I analyze the effect of inflation on poverty with a panel dataset comprising of 115 developing countries over the period 1981 - 2008. The dataset comprises of 10 observations for each country as the data is available at 3 year intervals. As previous studies indicate that poverty is also affected by factors such as income, external debt, educational attainment, and quality of governance, besides inflation, I take these as independent variables and poverty as the dependent variable. With the help of regression analysis, I find evidence supporting the view that inflation in, general, is positively correlated with poverty while income, educational attainment, and quality of governance show negative correlation with poverty in most of the specifications. Apart from the study of all the countries combined, I separately analyze the effect of inflation on poverty in low income countries, lower middle income countries, and upper middle income countries to see whether the effect of inflation is similar or different in countries with different levels of income. I find that although in most of the cases inflation shows a positive and statistically significant correlation with poverty, however, in the case of low income countries, the relationship between inflation and poverty is negative and statistically insignificant under certain specifications.