Money Supply And Inflation

RESEARCH TOPIC Money Supply and Inflation: A Case Study for The Gambia

Research Question/Hypotheses 1. Does Money Supply positively impact Inflation? 2. Does Money supply Granger cause Inflation? 3. Is there a correlation between any two of the three variables: money supply, inflation, and government expenditure?

Variables and Methodology Variables • Money supply • Inflation • Government expenditure Methodology • OLS • Granger causality

Hypothesis one π = α + β1M + ε .......... .......... .......... ....(1)

π = α + β 2 M + ρG + ε .......... .......... .......( 2)

Hypothesis two

M → π ........................(3) π → M ............................(4)

OLS RESULTS Dependent Variable: Gambia Inflation Method: Least Squares Date:

Time:

Sample: 1980 2010 Included observations: 31 Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

7.930993

3.284184

2.414905

0.0223

Gambia Money

0.100227

0.158977

0.630449

0.5333

R-squared

0.013520

Mean dependent var

9.612616

-0.020496

S.D. dependent var

10.56032

S.E. of regression

10.66799

Akaike info criterion

7.634713

Sum squared resid

3300.375

Schwarz criterion

7.727229

F-statistic

0.397466

Prob(F-statistic)

0.533338

Adjusted R-squared

Log likelihood Durbin-Watson stat

-116.3381 1.122045

Granger Causality Results Pairwise Granger Causality Tests

Date:

Time:

Sample: 1980 2010

Lags: 2

Null Hypothesis:

GA_IN does not Granger Cause GA_M

GA_M does not Granger Cause GA_IN

Obs

F-Statistic

Probability

29

0.31843

0.73032

8.00494

0.00217

Correlation Results Gambia

Inflation

Money

Gov Expenditure

Inflation

1

0.12

0.20

Money

0.12

1

-0.02

Gov Expenditure

0.20

-0.02

1

Conclusion • There is a positive relationship between money supply and inflation but not statistically significant at 5 percent level • Causaulity runs from money supply to inflation with lags of two and not the other way. • The exit no strong correlation between money and inflation, money and government expenditure, and inflation and government expenditure

Conclusion cond’t • Money supply and government expenditure are negatively correlated

Money, Inflation, Interest rate

−

M V =PY

−

% ∆M +% ∆V =% ∆P +% ∆Y i =r +π − + M d ( ) = f (i , Y ) P

+ M d e ( ) = f ( r +π , Y ) P

M s , M d →price

→π →i →M d

Recommendation • From FE and QTM, policy makers should take a closer look at the trend of inflation when determing the policy rate

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