Money and prices in the Maghreb countries: cointegration and causality analyses

Benamar, Abdelhak and CHERIF, Nasreddine and Benbouziane, Mohamed (2011): Money and prices in the Maghreb countries: cointegration and causality analyses. Published in: International Journal of Business and Social Science , Vol. Vol. 2, No. Special Issue – December 2011 (21 December 2011): pp. 92-107.

Abstract

Inflation has been the major global economic problem for most economies throughout the world over the last three decades. It affects individuals, businesses and governments. Many competing hypotheses have been advanced in the literature to explain its causes and give the appropriate remedial policies. One of these hypotheses is central to the quantity theory of money. According to this hypothesis, inflation results solely from a maintained expansion of the money stock at rates in excess of increases in the amount of money demanded in the economy. The paper examines the money-price relationship in the Three Maghreb countries (namely Algeria, Morocco and Tunisia) using Granger causality test. The results do not tend to support the quantity theorist’s view that money and prices have a long-run relationship, i.e., they do not tend to drift apart in the long run. However, as suggested by Granger (1986) money and prices could still cointegrate if other variables, which may have influenced prices, were included in the cointegration regressions. Second, the finding of a unidirectional causation from money to prices in the case of Morocco and Tunisia is in line with the monetarist’s view that money precedes and causes inflation. In fact, this finding supports Darrat’s (1986) finding that money causes inflation in Morocco and Tunisia. Thus the monetary authorities in these two countries can consider control of the money supply (M1) or (M2) to influence and control inflation. As suggested by monetarists, this can be best achieved by maintaining a steady rate of growth of the money supply, roughly corresponding to the long-run growth of the real output. Our results also show the apparent absence of causality between money and prices in the case of Algeria which is not easy to explain. A possible explanation may be that the data for the Consumer Price Index (CPI) are not reliable. This may be true given that the prices, which are reported by the authorities, are always lower than those actually paid in the market place.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration – bootstrap- money – prices- Granger causality – inflation – Maghreb
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Bezzaouya, M. (1991), “The Long -Run Relationship and Direction of Causality between Money and Prices in the Maghreb countries”, M.Phil thesis, University of Sheffield, England.

Boughrara Adel, (2002), “The Monetary Policy of the Central Bank of Tunisia: an Assessment”, The 9th Annual Conference of the Economic Research Forum (ERF) Al-Sharja - United Arab Emirates - October 26-28, 2002

Boulila, G. and Trabelsi, M., (2003), “The Causality Issue in the Finance and Growth Nexus: Empirical Evidence from MENA Countries” ,The 10th Annual Conference of the Economic Research Forum (ERF), Marrakech – Morocco – December 18-21.

Brillembourg,A. and Khan, M.S. (1979), “The relationship between money , income and prices: has money mattered historically”, Journal of Money ,credit and Banking, 11, 358-65.

Darrat, A. F. and Haj M.,(2002), “Economic Fluctuations in MENA: Does Financial Market Development Matter?”, ERF.s 9th annual conference, Al-Sharja, United Arab Emirates, October 26-28.

Darrat, A.F.(1986), “Money ,Inflation and causality in the North african Countries : an empirical investigation”, Journal of Macroeconomics, 8, 87-103.

Davison, A.C. and Kuonen, D., (2003), “An Introduction to Bootstrap With Applications in R”, Statistical Computing & Statistical Graphic Newsletter, Vol. 13, N°1.

Dickey,D.A and W.A. Fuller (1979) , “Distribution for estimators for auturegressive time series with a unit root”, Journal of the American Statistical Society 74, 427-431.

Dickey,D.A and W.A. Fuller (1981), “ Likelihood ratio statistics for autoregressive time series”, Econometrica, 49, 1057-1072.

Engle, R.F. and B.S. Yoo (1987) , “Forecasting and testing in cointegrated systems”, Journal of Econometrics, 35, 143-159.

Engle, R.F. and Granger,C.W.J. (1987), “Cointegration and Error Correction: Representation, Estimation and Testing”, Econometrica,55,251- 76.

Fisher Stanley, (1993), “ The role of Macroeconomic Factors in Growth”, Journal of Monetary Economics 32:485-512.

Fisher, S., (1977), “Long Term Contracts, Rational Expectations and The Optimal money Supply Rule ”, Journal of Political Economy, February.

Frie dman, M. (1956), “The Quantity theory of Money”, in Studies in the Quantity Theory of Money, ed., M. Friedman, University of Chicago Press, Chicago.

Friedman, M. and Shwartz, A.J. (1963), “The Definition of Money: Net wealth and neutrality as criteria”, Journal of Money Credit and Banking, 1, February, 1-14.

Fuller, W.A (1976), “Introduction to Statistical time series”, Wiley, NewYork.

Granger, C.W.J. (1986), “Developments of the Study in Cointegrated Variables”, Oxford Bulletin of economics and Statistic s, 48,213- 28.

Hesterberg, T, Monaghan, S., Moore, D.S., Clipson, A. and Epstein R., (2003) , “Bootstrap Methods and Permutation Tests”, ed., W.H. Freeman and Company, New York.

IMF, (2003), “Algeria: Selected Issues and Statistical Appendices”, IMF Country Report No. 03/69, March, 2003.

IMF, (2004), “Morocco: 2004 Article IV consultation – Staff Report”, IMF Country Report No. 04/162, June, 2004.

Jbili, A., Enders, K. and Treichel, V, (1997), “Financial Sector Reforms in Algeria, Morocco and Tunisia:A Preliminary Assessment”, IMF Working Paper, WP/97/81.

Jones, J.D. (1989), “A Comparison of Lag Length Selection Techniques in Tests of Granger Causality Between Money Growth and Inflation”, Applied Economics, 21, 809- 22.

Nachane, D. M., Nadkarni, R.M. and Karnick, A.V., (1988), “Cointegration and causality Testing of the energy-GDP relationship: A Cross Country Study”, Applied Economics, 20:1511-31.

Phelps, E.S. and Taylor, J.B., (1985), “Stabilising Powers of Monetary Policy under Rational Expectations”, Journal of Political Economy, February.

Sargent, N.P. (1976), “Exchange rate flexibility and the demand for money”, Presented at the American Finance Association Meeting, Atlantic City, Sept., 16-18.

Sims, C.G., (1972), “Money, Income and Causality”, Journa l of Macroeconomics, 5:503-10.

Taylor, M. P. (1988), “A Dynamic Model of Forward Foreign Exchange Rate Risk with Estimates for Three Major Exchange Rates”, The Manchester school, 56, 55- 68.