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

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  • 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.

Suggested Citation

  • Ignacio Lozano, 2008. "Budget Deficit, Money Growth and Inflation: Evidence from the Colombian Case," BORRADORES DE ECONOMIA 005127, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:005127
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    Cited by:

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    2. Mehmet BÖLÜKBAÞ, 2016. "The Effects of Economic Policies in Turkey: An Application for the Period After 2000," Journal of Social and Administrative Sciences, KSP Journals, vol. 3(4), pages 315-322, December.
    3. 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.
    4. Osman Sayid Hassan Musse & Abdelghani Echchabi & Hassanuddeen Abdul Aziz, 2015. "Fractional Reserve Banking and Price Stability: Evidence from Gulf Cooperation Council (GCC) Countries," American Journal of Economics and Business Administration, Science Publications, vol. 7(3), pages 101-105, August.
    5. Tarek Bouazizi & Zouhaier Hadhek & Mongi Lassoued, 2020. "General Government Balance Shocks and Their Impact on Some Tunisian Macroeconomics Variables: Evidence from a VAR Model," International Journal of Economics and Financial Issues, Econjournals, vol. 10(6), pages 69-83.
    6. Nelson Manolo Chávez Munoz & Marcos Vera Leyton, 2014. "Evaluación de los efectos del financiamiento del déficit fiscal en la inflación. Los casos de Chile, México y Colombia," Revista Equidad y Desarrollo, Universidad de la Salle, May.
    7. Ismail O. Fasanya & Ayinke Fajobi & Abiodun Adetokunbo, 2021. "Are Fiscal Deficits Inflationary In Nigeria? New Evidence From Bounds Testing To Cointegration With Structural Breaks," Economic Annals, Faculty of Economics, University of Belgrade, vol. 66(228), pages 123-148, January –.
    8. M. R. Anantha Ramu & K. Gayithri, 2017. "Fiscal deficit and inflation linkages in India: tracking the transmission channels," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 19(1), pages 1-24, April.
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    10. Amankwah, Ernest & Atta Sarfo, Prince, 2019. "The causal linkages among money growth, inflaion and interest rates in Ghana," MPRA Paper 96485, University Library of Munich, Germany.

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    More about this item

    Keywords

    Deficit; Money supply; Inflation; Hypothesis testing.;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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