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Granger causality of the inflation-growth mirror in accession countries

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  • Max Gillman
  • Anton Nakov

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..

Suggested Citation

  • Max Gillman & Anton Nakov, 2004. "Granger causality of the inflation-growth mirror in accession countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(4), pages 653-681, December.
  • Handle: RePEc:bla:etrans:v:12:y:2004:i:4:p:653-681
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    Cited by:

    1. 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.
    2. Chudik, Alexander & Mohaddes, Kamiar & Pesaran, M. Hashem & Raissi, Mehdi, 2013. "Debt, inflation and growth robust estimation of long-run effects in dynamic panel data models," Globalization and Monetary Policy Institute Working Paper 162, Federal Reserve Bank of Dallas.
    3. Polterovich, Victor, 2006. "Снижение Инфляции Не Должно Быть Главной Целью Экономической Политики Правительства России
      [Decreasing Inflation Should not Be the Main Task of the Russian Government Economic Policy]
      ," MPRA Paper 22064, University Library of Munich, Germany.
    4. 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.
    5. Davtyan Azat, 2014. "GMM Estimation and Shapiro-Francia Normality Test: A Case Study of CEE Economies," International Journal of Economic Sciences, University of Economics, Prague, vol. 2014(1), pages 12-26.
    6. Kamiar Mohaddes & Mehdi Raissi, 2014. "Does Inflation Slow Long-Run Growth in India?," Cambridge Working Papers in Economics 1440, Faculty of Economics, University of Cambridge.
    7. 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.
    8. Starr, Martha A., 2005. "Does money matter in the CIS? Effects of monetary policy on output and prices," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 441-461, September.
    9. Max Gillman & Mark N. Harris, 2010. "The effect of inflation on growth," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(4), pages 697-714, October.
    10. Hudson, John & Mosley, Paul, 2008. "Aid Volatility, Policy and Development," World Development, Elsevier, vol. 36(10), pages 2082-2102, October.
    11. Nuno Carlos LEITÃO, 2012. "Financial Management and Economic Growth: The European Countries Experience," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(2), pages 261-268, December.
    12. Waseem Khadim & Saddam Ilyas & Bilal Mehmood, 2016. "Of Inflation and Growth Nexus in BRIMC Economies," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 4(1), pages 32-45, January.
    13. Leitão, Nuno Carlos, 2012. "Bank credit and economic growth," MPRA Paper 42664, University Library of Munich, Germany, revised 2012.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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