Determinants of Inflation in a Micro Economy

This thesis aims to identify the determinants of inflation in Northern Cyprus. The thesis uses monthly data from 2015-2021. Unit root test results indicate that there is mixed-order integration for variables. The bounds test under the ARDL approach verified that the variables have a long-run association. The findings indicate that inflation rates in Turkey, minimum wage, electricity prices, exchange rates and government spending are the factors that have a significant impact on the long-term inflation rates in Northern Cyprus. Specifically, a 10 percentage point increase in inflation rates in Turkey, minimum wage, electricity prices, exchange rates, and government spending will result in a 9.4, 0.7, 0.99, 1.3, and -0.29 percentage point rise in inflation rates in Northern Cyprus, respectively. Therefore the main finding of this study is that the Türkiye's inflation rate largely determines and causes inflation in Northern Cyprus.