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Budget Deficit, Money Growth and Inflation: Evidence from the Colombian Case

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Author Info
Ignacio Lozano ()
Abstract

Evidence of the causal long-term relationship between budget deficit, money growth and inflation in Colombia is analyzed in this paper, considering the standard (M1), the narrowest (M0-Base) and the broadest (M3) definitions of money supply. Using a vector error correction (VEC) model with quarterly data over the last 25 years, the study found a close relationship between inflation and money growth on the one hand, and between money growth and fiscal deficit, on the other. The size of the long-term parameters looks acceptable, particularly when compared to what is seen in other countries, using analogous or different techniques. The conclusion, supported by several statistical tests, is that the Sargent and Wallace hypothesis would be the most appropriate approach to understanding the dynamics of these variables.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 537.

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Handle: RePEc:bdr:borrec:537

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Related research
Keywords: Deficit; Money supply; Inflation; Hypothesis testing. Classification JEL: H62; E51; E31; C12.;

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  1. Munir A. Jalil & Luis Fernando Melo, . "Una Relación no Líneal entre Inflación y los Medios de Pago," Borradores de Economia 145, Banco de la Republica de Colombia. [Downloadable!]
  2. Sikken, Bernd Jan & de Haan, Jakob, 1998. "Budget Deficits, Monetization, and Central-Bank Independence in Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 493-511, July.
  3. Barnhart, Scott W. & Darrat, Ali F., 1988. "Budget deficits, money growth and causality: Further OECD evidence," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 231-242, June. [Downloadable!] (restricted)
  4. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Economics Working Papers 1039, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2007. [Downloadable!]
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  5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  6. Martha Misas & Enrique López & Pablo Querubín, . "La Inflación en Colombia: Una Aproximación desde las Redes Neuronales," Borradores de Economia 199, Banco de la Republica de Colombia. [Downloadable!]
    Other versions:
  7. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Protopapadakis, Aris A. & Siegel, Jeremy J., 1987. "Are money growth and inflation related to government deficits? evidence from ten industrialized economies," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 31-48, March. [Downloadable!] (restricted)
  9. Joines, Douglas H., 1985. "Deficits and money growth in the United States 1872-1983," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 329-351, November. [Downloadable!] (restricted)
  10. Martha Misas & Carlos Esteban Posada & Diego Mauricio Vásquez, . "¿Está Determinado el Nivel de Precios por las Expectativas de Dinero y Producto en Colombia?," Borradores de Economia 191, Banco de la Republica de Colombia. [Downloadable!]
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  11. Sowa, Nii Kwaku, 1994. "Fiscal deficits, output growth and inflation targets in Ghana," World Development, Elsevier, vol. 22(8), pages 1105-1117, August. [Downloadable!] (restricted)
  12. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR, CES, MSH, vol. 19(40), pages 389-439, October. [Downloadable!] (restricted)
  13. De Haan, Jakob & Zelhorst, Dick, 1990. "The impact of government deficits on money growth in developing countries," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 455-469, December. [Downloadable!] (restricted)
  14. Karras, Georgios, 1994. "Macroeconomic effects of budget deficits: further international evidence," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 190-210, April. [Downloadable!] (restricted)
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