Effects of fiscal deficit and money M2 supply on inflation: Evidence from selected economies of Asia
Keywords:
Fiscal deficit, Broad money M2 supply, Inflation, PMG estimation, Differenced panel GMM estimator, Asian countriesAbstract
A sustained high growth rate of gross domestic product at a low inflation is one of the main goals of the majority of macroeconomic policies, so keeping the price stability plays an important role in determining the growth rate of output. This paper empirically investigates effects of fiscal deficit and broad money M2 supply on inflation in Asian countries, namely Bangladesh, Cambodia, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand, and Vietnam in the period of 1985-2012. By applying the Pooled Mean Group (PMG) estimation-based error correction model and the panel differenced GMM (General Method of Moment) Arellano-Bond estimator, the study finds out broad money M2 supply has significantly positive impact on inflation only in the method of PMG estimation whereas fiscal deficit, government expenditure and interest rate are the statistically significant determinants of inflation in both methods of estimation.
Downloads
References
Anshasy, A. E. E. (2012). Oil revenues, government spending policy, and growth. Public Finance and Management., 12(2), 120–146.
Arellano,M., & Bover, O.(1995).Another look atthe instrumental variable estimation of error-components models. Journal of Econometrics 68:, 29–51.
Asgharpur, H., Kohnehshahri, L. A., & Karami, A. (2007). The relationships between interest rates and inflation changes: An analysis of long-term interest rate dynamics in developing countries. International Economic Conference on Trade
and Industry (IECTI) 2007, 3-5 December, 2007.
Asian Development Bank. (2013). Key indicators for Asia and the Pacific 2013 (online). Available from http://www.adb.org/statistics
Bajo-Rubio, O., Díaz-Roldán, C., & Esteve, V. (2009). Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level. European Journal of Political Economy, 25(4), 525–539.
Blundell, R., & Bond, S.(1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87:, 115–143.
Catão, L. A. V., & Terrones, M. E. (2005). Fiscal deficits and inflation. Journal of Monetary Economics, 52(3), 529–554.
Cottarelli, C., Griffiths, M. E.L., Moghadam, R.(1998). The nonmonetary determinants of inflation: A panel data study. IMF Working Paper, No. 98/23.
Evans, J. D. (1996). Straightforward statistics for the behavioral sciences. Pacific Grove, CA: Brooks/Cole Publishing.
Fischer, S., Sahay, R., & Végh, C. A. (2002). Modern hyper and high inflations. Journal of Economic Literature, 40(3), 837–880.
Hossain, A. A. (2010). Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation. Journal of Asian Economics, 21, 564–578.
Hurlin (2004). Testing Granger causality in heterogeneous panel data models with fixed coefficients. Mimeo, University of Orléans.
Jayaraman, T. K., & Chen, H. (2013). Budget deficits and inflation in Pacific Island Countries: A panel study. Working paper 2013/03. School of economics, the University of South Pacific.
Karras, G. (1994). Macroeconomics effects of budget deficit: further international evidence. Journal of International Money and Finance, 13(2), 190–210.
King, M. (2002). No money no inflation–The role of money in the economy. Bank of England Quarterly Bulletin. Summer, 162–177.
Lin, H. Y., & Chu, H. P. (2013). Are fiscal deficits inflationary. Journal of International Money and Finance, 32, 214–233.
Maddala, G. S., &Wu, S.(1999).Acomparative study of unit roottests with panel data and a simple new test. Oxford Bulletin of Economics and Statistics, 61, 631–652.
McCandless, G. T., Jr., & Weber, W. E. (1995). Some monetary facts. Federal Reserve Bank of Minneapolis. Quarterly Review, 1995, 19(3), 2–11.
Nassar, K. (2005). Money demand and inflation in Madagascar. IMF Working Paper, WP/05/236.
Oomes, N., & Ohnsorge, F. (2005). Money demand and inflation in dollarized economies: The case of Russia. Journal of Comparative Economics, 33, 462–483.
Pelipas, I. (2006). Money demand and inflation in Belarus: Evidence from cointegrated VAR. Research in International Business and Finance, 20, 200–214.
Pesaran, M. H., Shin, Y., & Smith, R. P. (1997). Estimating long-run relationships in dynamic heterogeneous panels. DAE Working Papers, Amalgamated Series, 9721.
Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association 94:, 621–634.
Temple, J. (2000). Inflation and growth: Stories short and tall. Journal of Economic Surveys, 14, 395–426.
Walsh, C. E. (2003). Monetary Theory and Policy. Cambridge, Massachusetts: The MIT Press, 2003.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bullet of Economics and Statistics, 69, 709–748
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2015 Journal of Economics, Finance and Administrative Science
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
