Price stability has a positive causal relationship with long term economic growth
the verdict
CONTESTED
contested - evenly split
refutedsupported
the weight of evidence
1 source for · 2 against
Empirical studies present mixed findings regarding the relationship between inflation and economic growth, with some research indicating negative effects while others find positive directional effects under certain conditions.
Extended AbstractPurpose: In the literature of macroeconomics and Iranian economy, there is a significant relationship expected to be among economic growth, money supply and inflation. However, regarding the manner and the direction of the causal relationship among these economic variables, various opinions have been expressed, but there is no consensus. In recent decades, various countries in many parts of the world have implemented policies with increasing emphasis on price stability, money supply control and increasing economic growth. In Iran's economy, achieving this goal is considered as one of the most important goals of policy makers and economic planners. Currently, lack of coherence and lack of internal consistency of the government's economic policies and specifically the program of the country's economic administration from the perspective of macroeconomic variables are among the basic challenges of the country's economy.Methodology: Due to the importance of the issue, the relationships among the variables of economic growth, liquidity volume and inflation rate were investigated through the Granger causality test and with the seasonal data related to Iran's economy in the period of 2004:1-2022:1. In this research, in order to test the quantile-based Granger causality, the ADF test and the quantile autoregressive unit root test (QAR) introduced by Xiao (2004) and Galva (2009) were used.Findings and Discussion: The results show that there is a two-way Granger causal
چکیده [English] Extended Abstract Purpose: In the literature of macroeconomics and Iranian economy, there is a significant relationship expected to be among economic growth, money supply and inflation. However, regarding the manner and the direction of the causal relationship among these economic variables, various opinions have been expressed, but there is no consensus. In recent decades, various countries in many parts of the world have implemented policies with increasing emphasis on price stability, money supply control and increasing economic growth. In Iran's economy, achieving this goal is considered as one of the most important goals of policy makers and economic planners.
For example, in the middle quantile (0.5), the causality relationship is one-way from inflation to economic growth and, in the 0.35 quantile, it is from economic growth to inflation. In general, it should be noted that the causality relationship from inflation to economic growth is established in more quantiles than the causality from economic growth to inflation. Regarding the direction of causality, the results show that, in all the quantiles, the causality from economic growth to inflation is negative, and the causality from inflation to economic growth is positive in quantiles [0.05-0.75] and negative in rest of them.
Regarding the causal relationship between liquidity and economic growth, the results show that there is a one-way causal relationship between these two variables in total quantiles. This relationship is, thus, from liquidity to economic growth. However, in some quantiles such as the 0.15 or 0.25 quantiles, there is also evidence for a causal relationship from liquidity growth to economic growth. It is noteworthy that, in the initial quantiles [0.05-0.25], the sign of causality is negative in the sense that economic growth can reduce liquidity growth. However, in other quantiles, the effect of economic growth on liquidity growth is positive.
Also, the effect of liquidity growth on economic growth is negative in most quantiles. This is in the sense that an increase in liquidity growth causes a decrease in economic growth. The evidence shows that, in Iran's economy, worrying about the increase in the inflation rate is not considered a significant problem in terms of creating economic growth. Regarding the causal relationship between liquidity and inflation, in all the quantiles, there is a one-way relationship between liquidity volume and inflation. Regarding the direction of causality, the results show that the effect of liquidity on inflation is asymmetrical and non-linear.
The results regarding the effect of inflation on liquidity growth are generally positive. This proves the increases need for liquidity of the economy in the conditions of rising inflation. Conclusion and Policy Implications: In general, in order to save the country from this challenge, an economic stability program must be formulated and implemented. Of course, people's mentality and expectations also play a fundamental role in curbing inflation. Monetary and financial reforms will lead to containment of inflation and economic crisis.
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A common conundrum discussed in economic research revolves around the fact that nations endowed with plentiful natural resources often exhibit a lower gross domestic product (GDP). This conundrum is commonly called the "resource curse", where most empirical studies about the effects primarily focused on developed economies. At the same time, limited data is available regarding a burgeoning oil-exporting nation like the Republic of Yemen. This research endeavor aims to investigate the relationship between oil price Changes and Yemen's economic growth. Utilizing annual data spanning from 1990 to 2019, the study employs the auto-regressive distributed lag (ARDL) model to establish the long-term connection between oil price volatility and economic growth over both short and long timeframes. This study's outcomes indicate that oil price Changes have a significant positive relationship with Yemen's economic growth in both the long and short run. Oil rents show a significant negative relationship with economic growth in both the long and short run. The results of GLM, RLS, and GMM robustness checks are consistent with our model results. Based on these findings, we suggest that Yemen should diversify its economy by investing in agriculture and tourism, and focus on human capital, education, and research and development. These steps could reduce the economy's dependence on oil and enhance sustainable economic growth. These empirical insights and suggestions are particularly useful for policymakers as they help build sound external and economic policies to sustain long-term economic growth.
At the same time, limited data is available regarding a burgeoning oil-exporting nation like the Republic of Yemen. This research endeavor aims to investigate the relationship between oil price Changes and Yemen’s economic growth. Utilizing annual data spanning from 1990 to 2019, the study employs the auto-regressive distributed lag (ARDL) model to establish the long-term connection between oil price volatility and economic growth over both short and long timeframes. This study’s outcomes indicate that oil price Changes have a significant positive relationship with Yemen’s economic growth in both the long and short run.
Also, these outcomes are consistent with some studies, such as [ 71 , 72 ]. The connection between the inflation rate and economic growth is notably adverse. Consequently, a 1% rise in the inflation rate results in a long-term economic growth decline of 0.2085% at a 1% significance level. Research findings in this area consistently indicate that this negative association is more pronounced in countries struggling to uphold price stability during periods of high inflation [ 72 – 74 ]. Finally, we found that the unemployment rate has an insignificant positive relationship with economic growth.
The findings from GLM, RLS, and GMM methods consistently indicate a significant positive correlation between each of the oil prices and economic growth, while also revealing a significant negative relationship between oil rents and economic growth. It’s noteworthy that the remaining variables yield results that are in harmony with all the models, reinforcing the notion that the results correspond to our chosen ARDL model, whether in the long or short term. This contributes to the robustness and reliability of the findings. Table 9 Results for RLS, GLM, and GMM models.
Interestingly, the relationship between short-term unemployment and economic growth is marginally significant. An increase in unemployment during this period might slightly bolster economic growth, indicating complex dynamics at play. Turning to the long-term perspective, the connection between economic growth and oil price Changes reveals a substantial and positive correlation. Sustained increases in oil prices over the long term are linked to significant economic growth in Yemen. This underscores the potential benefits of stable oil prices for long-term economic development.
Given the significant positive relationship between short-term Changes in oil prices and economic growth, policymakers should consider strategies that harness the potential benefits of oil price volatility. Implementing mechanisms to leverage periods of elevated oil prices could allow the country to channel increased revenue towards targeted development projects, stimulating economic growth during these phases. The long-term perspective underscores the importance of stable oil prices for Yemen’s sustained economic growth.
Building on the significant positive relationship identified between long-term oil price stability and economic growth, policymakers should advocate for long-term contracts and agreements that provide stability in oil pricing. This could involve collaborations with international partners to ensure a predictable revenue stream, offering a foundation for consistent economic development efforts. The relationship between oil prices and GDP in Yemen contrasts with the patterns observed in more established oil-producing countries.
If the authors want to present a causal relationship, they need to make some argument that what they are studying is causal and probably use some form of statistical identification to do so. 2. It is unclear what the paper’s contribution is relative to the literature. As the authors say on page 7, “…Victor & Ogbonna
We acknowledge that our use of certain terminology may have unintentionally suggested that our study was focused on establishing a causal effect relationship between the variables under investigation. Our primary objective was to examine the long-term relationships between oil price changes and economic growth using the ARDL model, which is designed for this purpose. The robustness checks conducted using GMM, GLM, and RLS also support the presence of long-term relationships between the variables. We did not intend to imply a causal effect relationship, and we apologize for any confusion this may have caused.