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

International Journal of Economic Sciences and Applied Research, 5 (3): 115-128, December 2012

14 Pages Posted: 23 Jan 2013 Last revised: 3 Jul 2019

See all articles by Andreas G. Georgantopoulos

Andreas G. Georgantopoulos

National and Kapodistrian University of Athens; Panteion University of Athens - Panteion University of Political and Social Sciences

Anastasios Tsamis

Panteion University of Athens

Date Written: 2012

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

JEL Classification: C32, E60, O11

Suggested Citation

Georgantopoulos, Andreas G. and Tsamis, Anastasios, The Interrelationship Between Money Supply, Prices and Government Expenditures and Economic Growth: A Causality Analysis for the Case of Cyprus (2012). International Journal of Economic Sciences and Applied Research, 5 (3): 115-128, December 2012, Available at SSRN: https://ssrn.com/abstract=2205407

Andreas G. Georgantopoulos (Contact Author)

National and Kapodistrian University of Athens ( email )

Greece

Panteion University of Athens - Panteion University of Political and Social Sciences ( email )

136 Sygrou
Athens
Greece

Anastasios Tsamis

Panteion University of Athens ( email )

Athens
Athens 117 45
Greece

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