How Does the Budget Deficit Affect Inflation Rate-Evidence from Western Balkans

The main objective of this study is to find out if factors that we selected in our analysis have any effect on the Western Balkan Countries inflation rate, with the use of panel data from in the period of 2001-2017, yearly in a total of 102 observations. Two types of analysis used are secondary data and quantitative analysis by use of vector error correction model (VECM) and the multivariate time series, respectively. Multivariate time series is used to investigate if budget deficit and other explanatory variables have an impact on the inflation rate. The results from our analysis show that three of four determinates that we used are significant in the inflation rate. Used data were obtained from Eurostat and the World Bank. We used the augmented Dickey-Fuller test for data stationing as well as some diagnostic tests on model strength. From the analysis, it is true to say that budget deficit, GDP, government debt, and exchange rates have an impact that influences the inflation rate positively. While the unemployment rate does not have a significant effect on the inflation rate. The overall conclusion is that the reports we have selected have a significant impact on the level of inflation in the Western Balkan countries. In conclusion, the factors that we have studied have a great impact on inflation in Western Balkan Countries.