Granger Causality of the Inflation-Growth Mirror in Accession Countries

Max Gillman () and Anton Nakov

No 4845, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 relation 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.

Keywords: Granger causality; growth; inflation; structural breaks; transition; VAR; velocity (search for similar items in EconPapers)
JEL-codes: C22 E31 O42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ets, nep-mac and nep-tra
Date: 2005-01
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Journal Article: Granger causality of the inflation-growth mirror in accession countries (2004)
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