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

Andreas Georgantopoulos (ageorgantos@yahoo.com) and Anastasios D. Tsamis (atsamis@panteion.gr)
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Anastasios D. Tsamis: Department of Public Administration, Panteion University of Political and Social Sciences, 136, Sygrou Ave. 176 71, Athens, Greece

International Journal of Business and Economic Sciences Applied Research (IJBESAR), 2012, vol. 5, issue 3, 115-128

Abstract: 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.

Keywords: Economic development; Co-integration; Granger causality; Deficit financing (search for similar items in EconPapers)
JEL-codes: C32 E60 O11 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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