Since the main objective of the paper is to test the existence of causality relationship between the three macroeconomic variables, namely real GDP, price level (CPI) and M2 money supply (MS), analysis has been made there by employing 40 years of data (data from 1975-2014). VAR Granger causality test has been made to verify the objective of the paper.
The VAR Granger causality test result suggesting the existence of strong and significant correlation between the three variable s pairwise. The direction of causation is found to be a uni- directional causation between money supply and inflation, real GDP and Money supply and between real GDP and inflation and the causation runs from money supply to inflation, real GDP to Money supply and real GDP to inflation respectively. From the causation we observed that money supply has relationship with level of price and economic growth (real GDP). Basically targeting monetary expansion has a multiple role to boost economic growth and control the level of inflation.
Table of Contents
I. Introduction
1.1. Back ground of the study
1.2. Statement of the Problem
1.3. Objective of the study
1.4. Scope of the study
1.5. Organization of the paper
2. Literature Review
2.1Theoretical Literature Review
2.2. Empirical Literature Review
3. Research methodology
3. 1. Source and type data
3.2. Method of data analysis
3.3. Model specification
4. Empirical Result and discussion
4.1. Tests for Stationary, Unit root test (ADF)
4.2. VAR lag order selection criteria
4.3 .VAR Granger causality result
4.4. Wald test result results
5. Policy Implication and Recommendation
Research Objectives and Focus
This paper aims to investigate the causal relationships between three key macroeconomic variables in the Ethiopian economy: real Gross Domestic Product (RGDP), money supply (M2), and the price level (CPI). By utilizing 40 years of annual data (1975–2014) and applying VAR-based Granger causality tests, the study seeks to determine the direction of influence between these variables to assist in formulating effective monetary policy for macroeconomic stability.
- Examination of the causal link between real GDP and inflation.
- Evaluation of the causal relationship between money supply and inflation.
- Analysis of the directional influence between real GDP and money supply.
- Validation of long-run relationships among macroeconomic variables.
- Policy recommendations for controlling inflation through monetary expansion.
Excerpt from the Book
1.1. Back ground of the study
Keynesians, monetarists, and new classical economists agree that the steady state rate of inflation is closely related to growth of the money supply, and that monetary policy can not affect the equilibrium rate of unemployment.
The best slogan of monetarist school of thought “money matters”, they argued that changes in the amount of money in the circulation are the sources of other economic changes. In other words, the changes in the size of money supply have a number of implications on the macroeconomics variables especially inflation. Apart from being a powerful instrument of monetary policy, its expansion or contraction dictates the growth in investment and output of any economy. The supply of money is widely accepted as a key determinant of the levels of output and employment in the short run and the level of prices in the long run.
Reference [1] found that the change in inflation correlated, positively with the growth in money supply and negatively with respect to growth in real income or output ceteris paribus. In support of this argument, [2] found that the period of oil boom in Nigeria characterized by rapid monetary growth was consistent with the periods when the country experienced double-digit inflation.
Monetary policy targets of a countries central bank may depends on a number of factors that are unique and contextual to the country’s economy. According to [2], money supply, credit, interest rates and expenditure may be such targets. However, in the case of Ethiopia a, as is evident from the national bank of Ethiopia’s Monetary Policy Framework, money supply or money stock has been the intermediate target of monetary policy of Ethiopia.
Chapter Summaries
I. Introduction: Presents the study background, identifies the problem regarding inflation and economic stability, and outlines the objectives and scope of the research.
2. Literature Review: Surveys theoretical monetarist and Keynesian viewpoints and reviews empirical studies on the relationship between money supply, GDP, and inflation.
3. Research methodology: Details the source and type of data used, the econometric approach, and the specific VAR model equations formulated for the study.
4. Empirical Result and discussion: Provides the results from stationarity tests, lag order selection, Granger causality tests, and Wald tests, followed by an interpretation of these findings.
5. Policy Implication and Recommendation: Derives policy conclusions from the empirical results, emphasizing the role of targeted monetary expansion in managing inflation and economic growth.
Keywords
VAR Granger causality, macroeconomic variables, money supply, inflation, real GDP, monetary policy, Ethiopian economy, unit root test, Wald test, economic growth, price level, time series analysis.
Frequently Asked Questions
What is the core focus of this research?
The research focuses on analyzing the causal relationships between three fundamental macroeconomic variables—money supply, inflation, and real GDP—within the context of the Ethiopian economy.
What are the primary themes examined in the paper?
The central themes include the impact of monetary policy on price stability, the influence of economic growth on money stock, and the directional causality between inflation and output.
What is the main objective of this study?
The main objective is to determine the direction of causality between real Gross Domestic Product, money supply, and price levels to help the central bank achieve macroeconomic stability.
Which scientific methodology is utilized?
The study employs time series econometric methods, specifically VAR-based Granger causality tests, supplemented by unit root tests (ADF) and Wald tests to verify the causality results.
What does the main body of the paper cover?
The main body covers the theoretical and empirical review, the research design and model specification, detailed empirical analysis of the data, and a final discussion of the findings.
Which keywords characterize this paper?
Key terms include VAR Granger causality, money supply, inflation, real GDP, macroeconomic variables, and the Ethiopian economy.
What did the study conclude regarding the direction of causality?
The study found a uni-directional causal relationship where money supply affects inflation, real GDP influences money supply, and real GDP also influences inflation.
How does this study contribute to monetary policy in Ethiopia?
The study suggests that targeting monetary expansion in line with economic growth can play a vital role in controlling inflation levels in Ethiopia.
- Citar trabajo
- Moges Endalamaw Yigermal (Autor), 2016, The causality relationship between money supply, inflation and Real GDP, Múnich, GRIN Verlag, https://www.grin.com/document/414627
