Impact of Money Supply on Inflation Rate in Egypt: A VECM Approach

Djamal Dekkiche

doi:10.2478/eb-2022-0009

Impact of Money Supply on Inflation Rate in Egypt: A VECM Approach

Authors

Djamal Dekkiche Research Laboratory in Financial Market Management Using Automated Media and Mathematics (GMFAMI) https://orcid.org/0000-0002-1463-4413

DOI:

https://doi.org/10.2478/eb-2022-0009

Keywords:

Exchange rate, GDP, inflation rate, importations, money supply, VEC

Abstract

In this work, the research team employed a VECM regression model to evaluate the relationship between money supply and inflation rate (INF) in Egypt from 1990 to 2019. The model includes four independent variables: money supply (MS), imports (IMP), Gross Domestic Product (GDP), and exchange rate (EXCH). A Johansen-Juselius co-integration test and a Vector Error Correction Model were used to determine the existence of long-term and short-term links between the variables. The results demonstrated the existence of co-integrating links between the variables. Aside from the effects of GDP, all independent factors had a positive effect on the inflation rate. Depending on the results, the money supply is the primary long-term predictor of the inflation rate in Egypt.

References

Ajuzie, E. I. S., Edoho, F. M., Kang, W., Uwakonye, M. N., & Keleta, G. Y. (2008). Import Response And Inflationary Pressures In The New Economy: The Quantity Theory Of Money Revisited. Journal of Business & Economics Research (JBER), 6(5). https://doi.org/10.19030/jber.v6i5.2424

Al-Qudah, A. M. (2019). The Determinants of Financial Development in Jordan: VECM. The International Journal of Humanities & Social Studies, 7(12). https://doi.org/10.24940/THEIJHSS/2019/V7/I12/HS1912-067

Ali, H. A. M. (2012). Inflation Dynamics: The Case of Egypt. SSRN Electronic Journal. https://doi.org/10.2139/SSRN.1987425

Amassoma, D., Sunday, K., & Onyedikachi, E.-E. (2018). The influence of money supply on inflation in Nigeria. Journal of Economics & Management, 31(1), 5–23. https://doi.org/10.22367/jem.2018.31.01

Batarseh, A. (2021). The nature of the relationship between the money supply and inflation in the Jordanian economy (1980–2019). Banks and Bank Systems, 16(2), 38–46. https://doi.org/10.21511/BBS.16(2).2021.04

Bozkurt, C. (2014). Money, Inflation and Growth Relationship: The Turkish Case. International Journal of Economics and Financial Issues, 4(2), 309–322.

Ditimi, A., Sunday, K., & Onyedikachi, E.-E. (2018). The Upshot between Money Supply and Inflation in Nigeria. Journal of Economic Cooperation and Development, 39, 83–108.

El-Sakka, M. I. T., & Ghali, K. H. (2005). The Sources of Inflation in Egypt: A Multivariate Cointegration Analysis. Review of Middle East Economics and Finance, 3(3), 84–96. https://doi.org/10.2202/1475-3693.1046

Ferdousi, F., & Qamruzzaman, M. (2017). Export, Import, Economic Growth, and Carbon Emissions in Bangladesh: A Granger Causality Test under VAR (Restricted) Environment. Management of Cities and Regions. https://doi.org/10.5772/INTECHOPEN.70782

Franklin, E. O., Franklin, & Obinna, E. (2020). Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate. Economics and Business, 34(1), 139–155. https://doi.org/10.2478/EB-2020-0010

Ghazali, M. F., Amin, H., Muhammad, M. Z., & Samsu, S. H. (2009). Linkage between Money and Prices: A Causality Analysis for Malaysia. International Business Research, 1(4). https://doi.org/10.5539/IBR.V1N4P82

Hicham, A. (2020). Money Supply, Inflation and Economic Growth: Co-Integration and Causality Analysis. Studia Universitatis Babes-Bolyai Oeconomica, 65(2), 29–45. https://doi.org/10.2478/SUBBOEC-2020-0008

Hoang, T. T., Thi, V. A. N., & Minh, H. D. (2020). The impact of exchange rate on inflation and economic growth in Vietnam. Management Science Letters, 10(5), 1051–1060. https://doi.org/10.5267/J.MSL.2019.11.004

Joshi, U. L. (2021). Effect of Money Supply on Inflation in Nepal: Empirical Evidence from ARDL Bounds Test. International Research Journal of MMC, 2(1), 84–98. https://doi.org/10.3126/IRJMMC.V2I1.35134

Kiganda, E. O. (2015). Relationship between Inflation and Money Supply in Kenya. Journal of Social Economics, 2(2), 63–83.

MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563–577.

Mankiw, N. G. (2011). Principles of Economics, 5th edition. South-Western Cengage Learning. http://mankiw.swlearning.com/

Mansoor, A., Shoukat, Q., Bib, S., …& Zaman, K. (2018). The relationship between money supply, price level and economic growth in Pakistan: Keynesian versus monetarist view. Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, 22, 49–64.

Mishal, Z. A., & Abu-Dallo, I. M. (2014). Effect of Money Supply on Real Output and Price in Jordan: An Empirical Study. Jordan Journal of Economic Sciences, 1(2).

Nyumuah, F. S., Nyumuah, & S., F. (2018). An Empirical Analysis of the Monetary Transmission Mechanism of Developing Economies: Evidence from Ghana. International Journal of Economics and Finance, 10(4), 72–83. https://econpapers.repec.org/RePEc:ibn:ijefaa:v:10:y:2018:i:4:p:72-83

Ofori-Frimpon, K., Ofori, C. F., Danquah, B. A., & Zhang, X. (2017). The impact of money supply on inflation, a case of Ghana. Researchgate.Net, 3(1).

Oruc, E. (2020). The Relationship Between Inflation, Interest Rate, and Money Supply: Evidence from Turkey. Current Approaches In Social, Human And Administrative Sciences.

Ryczkowski, M. (2021). Money and inflation in inflation-targeting regimes – new evidence from time–frequency analysis. Journal of Applied Economics, 24(1), 17–44. https://doi.org/10.1080/15140326.2020.1830461

Sasongko, G., & Huruta, A. D. (2018). Monetary policy and the causality between inflation and money supply in Indonesia. Business: Theory and Practice, 19, 80–87. https://doi.org/10.3846/BTP.2018.09

Shelley, G., & Wallace, F. H. (2005). The relation between US money growth and inflation: evidence from a band-pass filter. Economics Bulletin, 5, 1–13.

Sultana, N. (2018). Impacts of money supply, inflation rate and interest rate on economic growth: A case of Bangladesh. Journal of Emerging Technologies and Innovative Research. https://doi.org/10.1729/JOURNAL.18824

Waingade, R. A. (2011). Money Supply and Inflation: A Historical Analysis. Undefined.

World Bank Open Data | Data. (n.d.). Retrieved October 14, 2022, from https://donnees.banquemondiale.org/

Wray, L. R. (2000). Money and Inflation. SSRN Electronic Journal. https://doi.org/10.2139/SSRN.1010331