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Abstract

The global disruptions of 2022, inflation risks have become more pronounced in various emerging and developing economies. These risks have become more intense in small open economies. Central Asian countries have faced higher food and energy price pressures and exchange rate volatility, making them more vulnerable to external risks and emphasizing differences in structures.

This paper aims to investigate regional heterogeneity in inflation risks in Kazakhstan, Kyrgyzstan, and Uzbekistan from 2014 to 2024. The analysis will particularly concentrate on how various economic structures, such as import dependency, commodity export vulnerability, exchange rate risks, and wage pressures, impact inflation risks in each of the countries. By relating economic structures to inflation risks, this paper will attempt to explain differences in country-specific risks in responding to external shocks.

The empirical analysis uses a panel dataset for various key macroeconomic indicators, which include the Consumer Price Index (CPI), broken down into the food and energy components, imports of goods and services as a percentage of GDP, fuel exports as a percentage of merchandise exports, exchange rates expressed in terms of the national currency per USD, and the average monthly nominal wages. These indicators cover various facets of structural dependence.

To identify the determinants of inflation vulnerability, the study employs panel fixed effects models with interaction terms between inflation and country-specific characteristics. A structural dependence index is constructed to measure the level of exposure to shocks. In addition, machine learning methods are used to evaluate robustness as well as to measure the relative importance of the various explanatory variables.

The paper contributes to the literature on inflation dynamics in emerging economies in that it highlights the role of structural heterogeneity and external dependence in the inflation response. In addition, it provides a framework for studying inflation vulnerability in small open economies and contributes to a better understanding of macroeconomic stability in Central Asia.