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Inflation, capital accumulation and economic growth in import-dependent developing countries

Ahortor, Christian R.K. and Adenutsi, Deodat E. (2009): Inflation, capital accumulation and economic growth in import-dependent developing countries.

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Abstract

The analytical framework of this paper makes use of a hexa-variate panel vector autoregressive (PVAR) approach on balanced annual panel data from 30 sampled import-dependent developing economies for the period, 1970-2006. The variables included in the empirical PVAR model are inflation, capital accumulation, output growth rate, interest rate, exchange rate, terms of trade and import dependence. Our empirical results suggest that the long-run static impact of capital accumulation and economic growth on inflation is negative. Besides, inflation and economic growth had dampening effects on capital accumulation contemporaneously in the long run. The short-run dynamics also indicate that while it is possible for any previous disequilibrium in inflation, capital accumulation and economic growth relationship to be corrected overtime, the speed of adjustment to equilibrium is so sluggish that it will take a very long time for this to manifest. Exchange rate and money supply produce short-run dynamics that drive price levels in import-dependent developing economies. It is, therefore, recommended that in order to reduce inflation in import-dependent economies, demand management policies should be used in the short run, while macroeconomic policies should be directed at enhancing economic growth and capital accumulation in the long run.

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