The Dynamic Relationship between Financial Institutions Depth and Inflation Rate in Syria

Abstract

Inflation and financial depth are among the factors influencing economic growth, and their interactions are a major concern in developing countries. The aim of the research was to study the dynamic relationship between financial depth and inflation rate in Syria during the period 1980-2018.The Phillips-Oliaris co-integration test, the Error Correction Model, Granger causality test, ARDL Bounds test approach, and Unrestricted Error Correction Model (UECM) were used. The results of the Phillips-Olliaris test indicated that there is a co-integration relationship between financial depth and inflation rate in the long run, and the results of the Error Correction Model indicated that there is a relationship that goes from financial depth to inflation rate, in addition to the existence of a unidirectional causality according to the concept of Granger from financial depth to inflation rate. The results also showed that there is a positive impact of both the financial depth and the exchange rate on the long-term inflation rate. And there is an inverse impact of each of the ratio of government revenues to GDP, economic growth rate, and exports on inflation rate. It can be concluded from these results that there is a dynamic and equilibrium relationship between financial depth and inflation rate in Syria during the period 1980-2018, and this relationship is unidirectional and extends from financial depth to inflation rate and not the other way around, in the short and long terms. The existence of inflationary effects resulting from financial depth in the long term. The increase in inflation rate does not impede financial depth in Syria as a result of the weak impact of inflation rate on financial depth during the studied period.