Dynamics of inflation and the gap product in Nicaragua

Abstract

The purpose of the article is to determine the impact of the output gap on the level of inflation in Nicaragua for the period 1992-2018. For this purpose, two econometric models were used; the first of multiple regression and the second an autoregressive vector (VAR). The results suggest that the output gap impacts inflation at 0.52 percent, and it was determined that fluctuations in the output gap can affect the usual level of prices per year and then this effect is diluted. Therefore, it is concluded that the aggregate supply approach is useful in explaining the inflationary dynamics in Nicaragua and that the inflation-output gap relationship is characterized by an inelastic condition.