Bounds Testing Approach to Cointegration: An Examination of Government Expenditures and Money Supply Relationships

Mastooreh Eshraghi and Babak Farjad


Dynamic modelling, Time series analysis, Government debt, Money supply


In countries that have adopted a monetary policy that is relatively independent from its fiscal policy, the monetary base is controlled by the central monetary authorities. Monetary and fiscal policies provide governments with the main lever for influencing the economy through the preservation of the value of national currency and, thus, economic stability. The main purpose of this study is to investigate the dynamic relations among the money supply, government expenditures and government debt to national banking systems. In this paper, these short-run and long-run processes are modelled using the autoregressive distributed lag (ARDL) approach to cointegration analysis. This study employs annual time series data on Iran from1980 to 2009. The elasticity of estimated government expenditures in both the short run and long run are statistically significant. In the long run, a 1% increase in government expenditures contributes to a 0.84% increase in the money supply in Iran. The model isolates the influence of government expenditures and government debt on the money supply. In light of the results, restrictive fiscal policy strategies, especially regarding government expenditures and government debt, are recommended to address Iran’s inflation problem.

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