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Granger causality of the inflation-growth mirror in accession countries

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Author Info
Max Gillman
Anton Nakov

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Abstract

The paper presents a model in which the exogenous money supply causes changes in the inflation rate and the output growth rate. While inflation and growth rate changes occur simultaneously, the inflation acts as a tax on the return to human capital and in this sense induces the growth rate decrease. Shifts in the model's credit sector productivity cause shifts in the income velocity of money that can break the otherwise stable relationship between money, inflation, and output growth. Applied to two accession countries, Hungary and Poland, a VAR system is estimated for each that incorporates endogenously determined multiple structural breaks. Results indicate Granger causality positively from money to inflation and negatively from inflation to growth for both Hungary and Poland, as suggested by the model, although there is some feedback to money for Poland. Three structural breaks are found for each country that are linked to changes in velocity trends, and to the breaks found in the other country. Copyright (c) The European Bank for Reconstruction and Development, 2004..

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Article provided by The European Bank for Reconstruction and Development in its journal The Economics of Transition.

Volume (Year): 12 (2004)
Issue (Month): 4 (December)
Pages: 653-681
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Handle: RePEc:bla:etrans:v:12:y:2004:i:4:p:653-681

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Hudson & Paul Mosley, 2007. "Aid Volatility, Policy and Development," Working Papers 2007015, The University of Sheffield, Department of Economics, revised Oct 2007. [Downloadable!]
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  2. Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Endogenous Growth," Monash Econometrics and Business Statistics Working Papers 24/04, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  3. Gillman, Max & Harris, Mark N., 2008. "The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries," Cardiff Economics Working Papers E2008/25, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  4. Balázs Égert & Rebeca Jiménez-Rodríguez & Evžen Kočenda & Amalia Morales-Zumaquero, 2006. "Structural changes in Central and Eastern European economies: breaking news or breaking the ice?," Economic Change and Restructuring, Springer, vol. 39(1), pages 85-103, June. [Downloadable!] (restricted)
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