Money-price Nexus: An Application of Markov Chain Methodology
Author: Rabail Mir

This study has been conducted to investigate the empirical evidence for money-price nexus by using a new econometric methodology i.e. Markov Chain Method (MCM) and compared it with the existing methodology. MCM has many essential differences from those currently in use. One of them is that we do not treat data as being capable of giving us final answer to any question, but only as a way to give clues about reality. The broad money (M2) and CPI data retrieved from WDI World Bank from 1960-2016. By using MCM based on median measure the analysis of CPI has shown that among all the countries, there are exceptional countries which remain in low inflation category with unusual too high transitions are United States, Trinidad and Tobago, Thailand, Switzerland, Sweden, South Africa, Philippines, Pakistan, Norway, New Zealand, Morocco, Mauritius, Libya, India, Denmark, Canada and Australia which have 28/14 unusual H-L and 28/13 L-H transitions in CPI respectively. The MCM results for broad money have not shown any unusual behavior among any of the countries used in the sample studies. To re-examine the hypothesis, broad money led to CPI the data show some unusual behavior in low and high category of ΔM2 and ΔCPI for six countries i.e. Ecuador, India, Myanmar, Trinidad and Tobago, Peru and South Africa. In order to assess hypothesis for low and high M2/CPI countries the results of Cross MCM have shown that there is a unidirectional causation from broad money to CPI for Ecuador and Myanmar. South Africa, Trinidad and Tobago and India supports a bidirectional causal relationship among broad money and CPI. Congo, Dem. Rep has a unidirectional causality running from CPI to broad money. On the other hand side results of Standard Granger Causality Test on the same data set, indicate that Ecuador, Myanmar, India, Trinidad and Tobago South Africa and Congo, Dem. Rep. has significant causal relationship between money and is bidirectional. For Peru, the Granger Causality test shows there is no significant causal relationship among broad money and CPI. The result of panel cointegration shows a long run relationship between money supply and inflation. For the magnitude of coefficient, cointegration test shows a partial effect of money supply on inflation. The difference in the findings for each country is may be due to the change in the system of incentives, implementation of different monetary policies, and structure of economy. Supervisor:- Dr. Abdul Jalil

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Keywords : Chain Methodology, Markov Chain Methodology, Money-price Nexus
Supervisor: Abdul Jalil

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