Critical Macroeconomic Variables Explaining Inflation in Ecuador: A Data-Driven Approach

Abstract

Inflation is a macroeconomic phenomenon that affects a country's purchasing power and economic stability. In Ecuador, dollarization limits the use of traditional monetary policy tools, making it necessary to analyze other macroeconomic variables to understand inflation. This study aims to identify the critical macroeconomic variables explaining inflation in Ecuador through a data-driven approach, providing a useful reference framework for their incorporation into future econometric models and economic policy decision-making. A quantitative approach was employed, based on time series analysis, cointegration tests, and correlations, using data from the Central Bank of Ecuador and the National Institute of Statistics and Census. The results show that total liquidity, money supply, and the real exchange rate maintain a long-term relationship with inflation, while the reference lending rate and public spending influence it in the short term. Additionally, it was confirmed that inflation in Ecuador does not follow a clear trend but is highly influenced by these factors. It is concluded that economic policy should focus on regulating total liquidity and the real exchange rate to mitigate inflationary effects. The application of appropriate econometric models will enhance inflation forecasting and control in the context of dollarization.