The relationship between money and prices in the maghreb countries: a cointegration analysis
AbstractInflation has been the major global economic problem for most economies throughout the world over the last three decades. It affects individuals, businesses and governments. Many competing hypotheses have been advanced in the literature to explain its causes and give the appropriate remedial policies. One of these hypotheses is central to the quantity theory of money. According to this hypothesis, inflation results solely from a maintained expansion of the money stock at rates in excess of increases in the amount of money demanded in the economy. The paper examines the money-price relationship in the Three Maghreb countries (namely Algeria, Morocco and Tunisia) using Granger causality test. The results do not tend to support the quantity theorist’s view that money and prices have a long-run relationship, i.e., they do not tend to drift apart in the long run. However, as suggested by Granger (1986) money and prices could still cointegrate if other variables, which may have influenced prices, were included in the cointegration regressions. Second, the finding of a unidirectional causation from money to prices in the case of Morocco and Tunisia is in line with the monetarist’s view that money precedes and causes inflation. In fact, this finding supports Darrat’s (1986) finding that money causes inflation in Morocco and Tunisia. Thus the monetary authorities in these two countries can consider control of the money supply (M1) or (M2) to influence and control inflation. As suggested by monetarists, this can be best achieved by maintaining a steady rate of growth of the money supply, roughly corresponding to the long-run growth of the real output. Our results also show the apparent absence of causality between money and prices in the case of Algeria which is not easy to explain. A possible explanation may be that the data for the Consumer Price Index (CPI) are not reliable. This may be true given that the prices, which are reported by the authorities, are always lower than those actually paid in the market place.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 12741.
Date of creation: Dec 2004
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Co integration – bootstrap- money – prices- Granger causality – inflation – Maghreb;
Find related papers by JEL classification:
- N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
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- Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
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- Alain DurrÃ© & Bernard Laurens & Alexandre Chailloux, 2009. "Requirements for Using Interest Rates As An Operating Target for Monetary Policy:The Case of Tunisia," IMF Working Papers 09/149, International Monetary Fund.
- Belhadj, Aam, 2009. "Heterogeneity of the Maghreb: the results of optimized monetary rules," MPRA Paper 40374, University Library of Munich, Germany.
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