Analysis of Monetary Policy and Inflation in Greece and Portugal in the Pre-Euro Era Based on a Testing the Kumara Swamy Theorem
Journal of Financial Management And Analysis, Vol. 26 (1), 2013
Posted: 3 Sep 2013
Date Written: August 27, 2013
The paper examines the long run relationship between money supply growth and inflation performance. More specifically, it tests empirically the explanatory power of the Kumara Swamy proposition regarding monetary policy (Swamy 1982, 2009), using data for Greece and Portugal in the pre-euro period (1970-2000). Both countries experienced high inflation in the 1970s and 1980s and followed similar disinflation processes during the 1990s. Thus, they are ideal candidates for testing the relationship between monetary policy and inflation. The empirical analysis presented here provided partial support to the Kumara Swamy hypothesis: while this hypothesis explains the inflation process in Greece better compared to the simple quantity theory equation, the opposite is true for the case of Portugal.
Keywords: Greek economy, Portuguese economy, Inflationary gap, Inflation, Monetary policy
JEL Classification: E31, E 49, E51, E52, 052
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