Money Supply and Inflation Essay

Money Supply and Inflation Essay

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Money Supply plays an important role in macroeconomic analysis, especially in selecting an appropriate monetary and fiscal policy. Considerably, I am yet to come across theoretical work that has been done on this topic (analysis money supply and its impact on other variable i.e. inflation, interest rate, real GDP and nominal GDP). However some other topics similar to this one have been done by AL-SHARKAS, Adel, where he uses the same technique and models on the topic ‘out put response to shocks to interest rate, inflation and stock returns. His work investigates the relationship between the Jordanian output and other macroeconomics variables such as inflation, interest rate and stock returns. His paper employs the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships within the system. The empirical results indicate that Interest rate and inflation are weakly negatively correlated and real stock returns and inflation is very weakly positively correlated for all leads and lags are negatively associated. Furthermore, the response of output (IPG) to shocks in stock returns (R1) is strongly positive up to the first 6 periods and after which the effect almost dies. This indicates that the relationship between stocks returns (R1) and real activity (IPG) is positive and inflation has a negative impact on IPG (Adel A. Al-Sharkas 2004).

MONEY SUPPLY GROWTH AND MACROECONOMIC CONVERGENCE IN ECOWAS by WEST AFRICAN MONETARY AGENCY (WAMA) is a writes up similar to this topic. Where the relationship between money supply major macroeconomic indicator where investigated for countries in West Africa includi...

... middle of paper ...

...mploys the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships between money supply shocks and inflation the system.

the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.

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