CAUSE-EFFECT RELATIONSHIP BETWEEN INFLATION AND THE FINANCIAL SECTOR IN THE REPUBLIC OF NORTH MACEDONIA

Agon BAFTIJARI, Llokman HEBIBI, Harun TAHIRI

Abstract

In the last two years, a key feature of the international and domestic environment has been the gradual economic recovery from the pandemic, which in the previous year, left serious health and economic consequences for countries around the world. Such movements contributed positively to the operation of the domestic financial sector and to the maintenance of financial stability. However, since the beginning of 2022, with the growth of geopolitical tensions and the outbreak of the war in Ukraine, the positive prospects for economic recovery have deteriorated sharply, which especially applies to European countries due to their geographical proximity and economic-financial connection with conflict areas. The new conditions have significantly exacerbated inflation risks, with price pressures already present from the second half of 2021 due to disrupted energy and commodity markets and disruptions in global supply chains impacted by the pandemic. So far, the consequences of the crisis have primarily affected the domestic economy through the movements of the global market of energy and basic products, which creates pressure on domestic inflation. The financial sector is the main source of financing productive economic projects in every economy in the world. It has a fundamentally important role in achieving economic growth and thus achieving sustainable economic development. The interaction between inflation and economic growth as well as economic growth and financial development has been extensively investigated in the literature. It can be said that there exists a consensus among economists to be that high rates of inflation are detrimental to economic growth performance. However, much less agreement exists about the mechanisms by which inflation affects economic activity. Financial development is viewed as an important channel through which inflation can adversely affect growth.

Pages: 17 - 27