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The Interrelationship between Money Supply, Prices and Government Expenditures and Economic Growth: A Causality Analysis for the Case of Cyprus

  • Andreas G. Georgantopoulos

    ()

    (Department of Public Administration, Panteion University of Political and Social Sciences, 136, Sygrou Ave. 176 71,Athens, Greece)

  • Anastasios D. Tsamis

    ()

    (Department of Public Administration, Panteion University of Political and Social Sciences, 136, Sygrou Ave. 176 71, Athens, Greece)

This paper investigates the short run as well the long run relationships between money supply, inflation, government expenditure and economic growth by employing the Error Correction Mechanism (ECM) and Johansen co-integration test respectively for the case of Cyprus using annual data from 1980 to 2009. Collectively, empirical results imply that public spending promotes economic development in Cyprus. However, deficit financing by the government causes more liquidity effects but also inflationary pressure in the economy. Results show that inflation negatively effects economic growth probably due to adverse supply shock. Money supply should be allowed to grow according to the real output of the economy but excess growth of money causes inflationary pressure in case of Cyprus. Therefore, this paper suggests that the government should control its current expenditure that stimulates aggregate demand and to focus more on development expenditure which stimulates aggregate supply and increases real output level.

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Article provided by Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece in its journal International Journal of Economic Sciences and Applied Research (IJESAR).

Volume (Year): 5 (2012)
Issue (Month): 3 (December)
Pages: 115-128

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Handle: RePEc:tei:journl:v:5:y:2012:i:3:p:115-128
Contact details of provider: Web page: http://ijbesar.teiemt.gr/

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  1. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
  2. Woon Gyu Choi & Michael B. Devereux, 2006. "Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 8.
  3. Jiranyakul, Komain, 2007. "The Relation between Government Expenditures and Economic Growth in Thailand," MPRA Paper 46070, University Library of Munich, Germany.
  4. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. International Monetary Fund, 2008. "Impact of Government Expenditure on Growth: The Case of Azerbaijan," IMF Working Papers 08/115, International Monetary Fund.
  9. Hassapis, Christis & Pittis, Nikitas & Prodromidis, Kyprianos, 1999. "Unit roots and Granger causality in the EMS interest rates: the German Dominance Hypothesis revisited," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 47-73, January.
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