Abstract:The present study investigates the dynamics of inflation, GDP and exchange rate and money supply in India for the period
Contribution/ OriginalityThis study is one of very few studies which has investigated the growth inflation relationship in the context of India in a new approach using VAR model.
“…For example, Gali (1992) finds that GDP has unit root, while money supply and prices are level stationary. The finding that the GDP has unit root tallied with our finding and that of Behera (2016), Denbel et al (2016), Rami (2010), etc. Our study have similar findings with that of Gali (1992) in the case of GDP but differ in conclusion as per the case of money supply and inflation.…”
Section: Results Presentation and Discussionsupporting
The study examines the relationships among money supply, output and prices. Quarterly data were sourced from the Federal Reserve Bank of St. Louis, which spanned from 1996 Q2 to 2019 Q1. Four variables were included in the study: GDP, inflation (Consumer Price Index [CPI]) and two measures of money supply (M1 and M3). The findings of the study reveal that money supply is correlated with India’s output as well as inflation. Johansen’s test of co-integration reveals the existence of a long-term relationship among the variables. Another striking finding of this study is that neither M1 nor M3 could cause output (GDP) in the short run, but both Granger-cause inflation in the short run, which may be attributed to the output growth capacity limit of the country. The monetary policy disturbance in relation to other variables was examined through a structural vector autoregressive (SVAR) model that indicates that the two measures of money supply exert a positive impact on GDP. Similarly, the finding also shows that a monetary policy shock from the two measures of money supply causes a positive and continuous increase in inflation in India. Thus, money supply measure M3 is a potential indicator of movement in India’s output; hence the monetary authority should be mindful of inflation while targeting output expansion through money supply.
“…For example, Gali (1992) finds that GDP has unit root, while money supply and prices are level stationary. The finding that the GDP has unit root tallied with our finding and that of Behera (2016), Denbel et al (2016), Rami (2010), etc. Our study have similar findings with that of Gali (1992) in the case of GDP but differ in conclusion as per the case of money supply and inflation.…”
Section: Results Presentation and Discussionsupporting
The study examines the relationships among money supply, output and prices. Quarterly data were sourced from the Federal Reserve Bank of St. Louis, which spanned from 1996 Q2 to 2019 Q1. Four variables were included in the study: GDP, inflation (Consumer Price Index [CPI]) and two measures of money supply (M1 and M3). The findings of the study reveal that money supply is correlated with India’s output as well as inflation. Johansen’s test of co-integration reveals the existence of a long-term relationship among the variables. Another striking finding of this study is that neither M1 nor M3 could cause output (GDP) in the short run, but both Granger-cause inflation in the short run, which may be attributed to the output growth capacity limit of the country. The monetary policy disturbance in relation to other variables was examined through a structural vector autoregressive (SVAR) model that indicates that the two measures of money supply exert a positive impact on GDP. Similarly, the finding also shows that a monetary policy shock from the two measures of money supply causes a positive and continuous increase in inflation in India. Thus, money supply measure M3 is a potential indicator of movement in India’s output; hence the monetary authority should be mindful of inflation while targeting output expansion through money supply.
“…Recently, Hung and Thompson (2016) explore that using data for 23 OECD countries from 1960 to 2009 demonstrates that workers' power has a larger effect on the inflation rate than money growth. Behera (2016) performs that the cointegration result shows that there is at least one linear combination in the long run and hence there is a long-run equilibrium relationship between variables in the model, which suggests that money supply and the exchange rate has a positive effect on the GDP growth in the economy. The error correction results indicate that correct and negative sign for gross domestic product and exchange rate.…”
“…Finally, the analysis assessed that inflation and economic growth are linked positively, and the inflation response to growth rate adjustments are more significant than that of inflation rate adjustments. Behera (2016) analyzed cross-country analyses in 170 emerging and industrialized countries. The research used the annual frequency data series from 1960-1992.…”
Economic growth is currently an essential phenomenon for emerging countries worldwide and has gained the researchers' intentions. Thus, the current study aims to examine the role of foreign direct investment (FDI), capital formation, inflation, money supply, and trade openness on the economic growth of Asian countries. The data has been extracted from the twenty emerging Asian countries from 2007 to 2018 using the most popular database named World Development Indicators (WDI). The fixed-effects model, along with the robust standard error, has been used for checking the impact of predictors on the economic growth of Asian countries. The results revealed that the predictors such as FDI, capital formation, money supply, and trade openness have positive association with economic growth, while inflation has a negative association with the economic growth of Asian countries. These findings are suitable for the new arrivals who want to examine this area in the future and for the regular traders who want to develop policies related to economic growth.
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