Granger Causality of the Inflation - Growth Mirror in Accession Countries

29 Pages Posted: 3 Dec 2004

See all articles by Max Gillman

Max Gillman

Central European University (CEU) - Department of Economics

Anton Nakov

European Central Bank (ECB); CEPR

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The paper presents a model in which the exogenous money supply causes changes in the inflation rate and the output growth rate. While inflation and growth rate changes occur simultaneously, the inflation acts as a tax on the return to human capital and in this sense induces the growth rate decrease. Shifts in the model's credit sector productivity cause shifts in the income velocity of money that can break the otherwise stable relationship between money, inflation, and output growth. Applied to two accession countries, Hungary and Poland, a VAR system is estimated for each that incorporates endogenously determined multiple structural breaks. Results indicate Granger causality positively from money to inflation and negatively from inflation to growth for both Hungary and Poland, as suggested by the model, although there is some feedback to money for Poland. Three structural breaks are found for each country that are linked to changes in velocity trends, and to the breaks found in the other country.

Suggested Citation

Gillman, Max and Nakov, Anton A., Granger Causality of the Inflation - Growth Mirror in Accession Countries. Available at SSRN:

Max Gillman (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
+36 1 327 3227 (Phone)
+36 1 327 3232 (Fax)

Anton A. Nakov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

CEPR ( email )

United Kingdom

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