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

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  • Ignacio Lozano

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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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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 005127.

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Length: 25
Date of creation: 09 Nov 2008
Date of revision:
Handle: RePEc:col:000094:005127

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Keywords: Deficit; Money supply; Inflation; Hypothesis testing.;

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  1. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  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. Martha Misas A. & Carlos Esteban Posada P & Diego Mauricio Vásquez E, 2003. "¿Está determinado el nivel de precios por las expectativas de dinero y producto en Colombia?," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  4. Martha Misas Arango & Enrique López Enciso & Pablo Querubín Borrero, 2002. "La Inflación en Colombia: Una Aproximación desde las Redes Neuronales," BORRADORES DE ECONOMIA 003029, BANCO DE LA REPÚBLICA.
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  12. Luis Ignacio Lozano E., 2001. "COLOMBIA'S PUBLIC FINANCE IN THE 1990s: A DECADE OF REFORMS, FISCAL IMBALANCE, AND DEBT," BORRADORES DE ECONOMIA 002140, BANCO DE LA REPÚBLICA.
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  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.
  15. 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.
  16. Fatih Ozatay, 2000. "The 1994 currency crisis in Turkey," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 3(4), pages 327-352.
  17. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR & CES & MSH, vol. 19(40), pages 389-439, October.
  18. 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.
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Cited by:
  1. Cuma BOZKURT, 2014. "Money, Inflation and Growth Relationship: The Turkish Case," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 309-322.

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