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Fiscal Deficit and Inflation: An empirical analysis for India

Aviral Kumar Tiwari A. P. Tiwari 2
1

This study examines the linkage between fiscal deficit and inflation in India. The main objective of this study is to examine the factors that are responsible for increasing fiscal deficit in India, by taking into account all factors that can affect the status of fiscal deficit. The study finds that inflation is not at all cause of fiscal deficit. However, government expenditure and money supply are found to be important determinants of mounting fiscal deficit. Key ords! "udget #eficit, Inflation, $oney supply. %&' (lassification! ()*, &+), &,), H-* 1. Introduction The relationship between budget deficit/fiscal deficit, money growth, government expenditure and inflation has acquired a prominent place in literature on monetary economics. From a theoretical perspective, both the monetarist hypotheses, based originally on the quantitative theory of money, and the fiscal theory of the price level, nown as the quantitative theory of government financing of debt, represent the two traditional approaches to understanding what lin s these macroeconomic variables. !ecently, the new "eynesian theory, build
Aviral Kumar Tiwari, Management Research Scholar, ICFAI University, Tripura. Email: aviral.eco gmail.com ! aviral."r.ti#ari gamil.com A. P. Tiwari, Rea%er, &epartment o' Economics, (i%yant )in%u College, University o' *uc"no#, *uc"no#. Email: %r.ti#ariap gmail.com
$
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on dynamic general macroeconomic models with imperfect competition, offers an alternative explanation of the dynamics of these variables. #nflation is generally associated with rapid monetary expansion. #ndia$s experience is not different from other countries. %hy fiscal policy matters for monetary policy and vice versa is because there is little standing to lowering inflation by monetary measures alone in the presence of soaring budget deficits and public debt &'ahan 1(()*. Though, instant cause of inflation is associated with money supply, developments in monetary stance are indicative of other sectors of the economy. #n #ndia, it is generally argued that fiscal imbalances might have played an important role in explaining price fluctuation. +ence, twin problems of fiscal deficit and inflation have been given a lot of importance in budget of ,entral government in #ndia. #n decade of 2---s the average percentage annual growth rate of inflation was negative. #t turned positive in 21st century. #n last few years percentage annual growth rate of inflation increased rapidly. .ignificantly, in 2--)/ -( it crossed the level of double digit. +owever, average percentage annual growth rate of fiscal deficit has declined since 1()-s to 2---s. 0ut it has increased in 21st century more than twice of that of average percentage annual growth rate 2---th. 1stimates reveal that average percentage annual growth rate of money supply has been more or less constant in all the decades. %hen we consider total government expenditure it is found that it has increased not only in absolute numbers but also in terms of average percentage annual growth rate and percentage annual growth rates1. #t is evident from the figure2 1, 2, and 2 that gross fiscal deficit, government expenditure and money supply have increased considerably over years. +owever, figure 3 indicates that inflation has
1

Detailed estimates of all variables are presented in annexure 1.

Figures related to all variables have been presented in annexure 2.

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increased up to 1((4 and suddenly it has fallen considerably and again it has got momentum since 2---. !est of the paper is organi5ed as follows6 section 2nd presents review of literature followed by discussion on data source, variables definition and methodology adopted for empirical analysis in section 2rd. #n section 3th results of data analysis have been presented followed by conclusions drawn from the empirical analysis in section 4th. 2. Literature review The relationship between budget deficit, money supply/growth and inflation is a very common debate in economic literature. 7ots of economists have analy5ed the relationship among these three variables for years by using different countries, different econometric technique and different time period. 8ost of the studies have analy5ed how fiscal deficit and money supply affect inflation which will be evident from the literature review as discussed follows. 9ery few attempts have been made to analy5e the causation running from both ways i.e., how inflation affects fiscal deficit and fiscal deficit affects inflation. &:gheveli and "han 1(;), 8iller 1()2, <debbio 1(() etc.* 8iller &1()2* points that fiscal deficit in all cases &whether moneti5ed or not* lead to generate inflationary pressure in the economy. Fischer &1()(*, by analy5ing the relationship between budget deficit and inflation in different countries found that the countries with high inflation have strong relationship among inflation and budget deficit. +e noted that high inflation has reducing effect on tax revenue which is nown as Tan5i/=livera 1ffect. :lso, high rate of inflation increases budget deficit by declining seignorage revenue. .habbir and :hmed &1((3* found that budget deficit has a positive and significant effect on inflation, independent of its indirect effect via money supply that in this case turns out to be minor or negligible. Year XIV, no. 42 December 2011

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,haudhary and :hmad &1((4* found that domestic financing of the budget deficit, particularly from the ban ing system, is inflationary in the long run. The results provide a positive relationship between budget deficit and inflation during acute inflation periods of the seventies. They also find that money supply is not exogenous> rather, it depends on the position of international reserves and fiscal deficit and it has emerged as an endogenous variable. The general conclusion is that the execution of monetary policy is heavily dependent on the fiscal decisions made by the government. #n order to control inflationary pressure, government needs to cut the si5e of budget deficit. <dungu &1((4* has investigated the lin among the fiscal deficit, inflation and money supply on one hand and money supply and inflation on the other hand. +e found that for the "eynesian economy budget deficit affects growth of monetary base and money supply affects interest and hence inflation. # hide &1((4* examined the methods of deficit financing and found that whether the deficit is financed by barrowing from ban s, from abroad or the public, in most of the cases any way of financing will generate inflationary pressure. +ondroyiannis and ?apapetrou &1((;* examined the direct and indirect effect of budget deficit on inflation in @reece and found that budget deficit has an indirect raising effect on inflation. +owever, they also stated that an increase in inflation results in an increase in budget deficit. "ivilcim &1(()* has analy5ed the long run relationship between budget deficit and inflation in Tur ish economy during 1(4-/1();. +e found that a change in budget deficit cause to change in inflation on the same direction. 1geli &2---* examined the relationship among inflation tax, budget deficit and public spending. +is result was reverse relation among inflation tax and budget deficit. +e also stated that increasing public spending leads to increase in budget deficit. 1geli &2---* concluded that this disequilibrium results from governments$ wrong policies such as using borrowing in order to finance the deficit. Year XIV, no. 42 December 2011

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Tan5i &2---* examined the relationship between tax revenue and budget deficit in 7atin :merican countries. +e found that in 7atin :merican countries the budget deficit and public deficit increase even after rise in the tax revenue. +e stated that this imbalance results from the deficient and inefficient social programs. 9ieira &2---* examined the relationship between fiscal deficit and inflation for six maAor 1uropean countries. The author provided a little support for the proposition that budget deficit has been an important contributing factor to inflation in these economies over the last 34 years. =n the contrary, where evidence exists of a long/run relationship between inflation and deficits, this evidence is more consistent with the view that it was inflation that contributed to deficits, rather than the reverse. ,evdet et al. &2--1* examined the long/run relationship between inflation rate, budget deficit, and real output growth. They conclude that changes in the consolidated budget deficit have no permanent long run effect on the inflation rate and ?ublic .ector 0orrowing !equirement &?.0!* from ban s does have a long/run relationship with inflation rate. ,atao and Terrones &2--2* have shown that there is a strong positive relationship between fiscal deficits and inflation among high/inflation and developing country groups, but not among low/inflation advanced economies. They found that 1 percentage point reduction in the ratio of fiscal deficit to @ross 'omestic ?roduct &@'?* typically lowers long/run inflation by 1.4 to B.- percentage points, depending on the si5e of the inflation tax base. Cen &2--2* has analy5ed the relationship between tax revenue and inflation. Cen &2--2* found that high inflation cause to decrease in tax revenue in crisis time and low level of tax revenue cause to tax loss which leads to high budget deficit. +e also cross/examines the role of time in the process of tax collection. +e concluded that short term tax collection is better than long term tax collection. #n the long run the real value of tax revenue tends to decline because of high inflation. Year XIV, no. 42 December 2011

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Dabal, 0aldemir and 0a imli &2--3* made a study to examine the causes about the imbalance between public spending and public revenue in Tur ey. They highlighted that the government finances budget deficit by using short term advance money. #t also results in the money supply to increase which results in inflation to go up. They concluded that high budget deficit leads high inflation in Tur ish 1conomy. .olomon and %et &2--3* found a strong positive relationship between inflation and budget deficit in Tan5ania. They stated that budget deficit has a significant effect on inflation. They also concluded that developing countries should give more importance to inflation because inflation tends to be affected from many economic shoc s such as high budget deficit. Therefore, inflation should be controlled by efficient fiscal policies. :gha and "han &2--B* found that inflation in ?a istan is mainly attributable to unsustainable fiscal deficit. Financing of deficit through the ban ing system from printing of new money and creating interest/bearing debt affects the general price level. 3. Data type, data source, variables description, estimation methodology and hypothesis formulation 3.1 Data type, data source variables description, estimation methodology: This study has used time series data sourced from +andboo of statistics of !eserve 0an of #ndia &!0#*. #n this study money supply has been measured through the measure of 82 &0road money*, inflation has been measured through consumer price index of all level &following 'ritsa is 2--3, !other 2--3 and ,atEo and Terrones 2--2*1, gross fiscal deficit has been ta en as a measure of deficit and
We have employed CPI as it is considered a sufficiently accurate measure of inflation in the literature, where CPI reflects the cost of acquiring a fixed basket of goods and services by the average consumer or "typical consumer". Finally, in an open economy, CPI inflation will in part be determined by price movements of foreign goods. This could occur due to the direct inclusion of such goods in the consumption basket or through their use as intermediate inputs.
1

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government expenditure has been measured by total expenditure of central government. The period 1(;-/;1 to 2--)/-( has been ta en for analysis in this study. #n this study natural log &ln* of all variables has been ta en in order to ma e series of less order of autoregressive i.e., to minimi5e fluctuations in the series. For empirical analysis log linear multiple regression model has been used which is specified as follows6 ln&@ross Fiscal 'eficit*tF GHI1ln&#nflation*tHI2ln&8oney .upply*tHI2ln&@overnment 1xpenditure*tJJJJJJJJJJJJJJJJJJJJJJ ..&1*. 3.2. ypothesis !con"ecture# formulation:

1a: Inflation increases gross fiscal deficit i.e., we e$pect %1&'. #n general, inflation has raising effect on budget deficit by raising nominal interest rate. :ccording to Fischer 1ffect, nominal interest rate consists of real interest rate and expected inflation rate. #f the inflation expectation increases, it causes to rising nominal interest rate which leads to the public debt to go up. #nterest payment covers the big part of public payment in developing countries. #f interest rate increases because of inflation, it leads to raise interest payment as well as budget deficit by causing the 'ebt/@'? ratio to increase and thereby increases fiscal deficit1. There are many other channels

In spite of the positive relationship between inflation and budget deficit as stated above, in some cases inflation and budget deficit move in reverse direction. Inflation tax is important for this. If inflation tax is higher than normal level, as inflation increases people avoid holding money because the cost of holding money is high. Thus, real monetary base tends to decrease as inflation tax correspondingly. Holding money would be a costly activity. Inflation tax would be a type of tax revenue which makes the budget deficit decline. Another type of negative relation between inflation and budget deficit occurs because of public borrowing stocks. If borrowing is not indexed to the inflation, as the inflation rise the real value of public borrowing stocks would decline. As the public borrowing stock fall, budget deficit is expected to decrease.

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through which inflation influences the real budget deficit.1The most often cited channel is the K=livera/Tan5i effectL &=livera 1(B;, Tan5i 1(;;* that deteriorates real budget revenues through lags in tax collection. 2a: (oney supply decreases fiscal deficit i.e., we e$pect %2)'. The degree of monetary policy credibility is an important factor that determines the fiscal position. :s credible monetary policy implies an independent central ban , it prevents moneti5ation of government debt to a certain degree. 'ahan &1(()* summari5es the impact of monetary policy on the fiscal stance. The first one is the revenue effect. #n the short/run, tight monetary policy may lead to lower output growth and for that reason, tax revenues might reduce, causing a rise in the budget deficit. The second one is the effect on public debt. : tight monetary policy results in higher interest rates, ma ing servicing public debt expensive. %ith caution, the overall impact would depend on how economic agents formulate their expectations and the degree of credibility of monetary policy. There are two possibilities6 &i* the public expects that the monetary authority will fail to achieve the inflation target and eventually abandon the tight policy &ii* the tight policy will bring down inflation &and inflation expectations* once the policy is announced. #n the first scenario, tight policy may lead to higher inflation and higher nominal interest rates. #n the second scenario, the expected reaction in inflation tends to decrease the nominal interest rate and thus the debt effect is ambiguous. Further the sign of the debt effect is positive if the government is a net borrower and negative if the government is a net lender. The magnitude of the debt effects depends on the level of public debt, the maturity of government bonds and the share of
1

All of the factors in essence are distortional effects of inflation, determined by nominal state institutions. A brilliant overview of the real effects of inflation can be found in Fischer and Modigliani (1979) and Fischer (1989).

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flexible interest rate on bonds and the sensitivity of various interest rates. The third one is the effect due to seigniorage. : deceleration in the rate of money creation &through open mar et operations* leads to an increase in debt creation, resulting in higher budget deficits in subsequent periods. 3a: *overnment e$penditure increases fiscal deficit i.e., we e$pect %3&'. #n general, increase in government expenditure &either because of operation of %agner$s law or otherwise* will increase fiscal deficit if revenue is not generated in the same proportion. +owever, there are other reasons also due to which government expenditure can increase fiscal deficit even after raise in tax revenue as Tan5i &2---* have found that in 7atin :merican countries that budget deficit and public deficit increase even after rise in the tax revenue due to deficient and inefficient social programs. #ronically, Cen &2--2* found that high inflation cause to decrease in tax revenue in crisis time and low level of tax revenue cause to tax loss which leads to high budget deficit. Further, 1geli &2---* also stated that increasing public spending leads to increase in budget deficit. 1geli &2---* concluded that this disequilibrium results from governments$ wrong policies such as using borrowing in order to finance the deficit. +. Data analysis and empirical findings Table 1 presents descriptive statistics &in terms of 8ean, 8edian, .tandard 'eviation &.. '.*, ,oefficient of 9ariation &,.9.*, . ewness, "urtosis and Marque/0era &M/0* statistics* of variables used for empirical analysis in the present study. From the table 2 it is evident that .. '. of money supply is highest &1.4;* and inflation has lowest .. '. &-.41*. .ince .. '. is not better measure to measure fluctuations in the series therefore ,.9. has been calculated which shows that ,.9. of fiscal deficit is highest and ,.9. of money supply is second highest Year XIV, no. 42 December 2011

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while ,.9. of inflation is lowest. M/0 statistics shows that all variables are having lognormal distribution as data do not support to reAect the null hypothesis that variables under consideration have followed normal distribution.

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8ean 8edian 8aximum 8inimum .tandard 'eviation &.. '.* 1.3(B23; ,oefficient of variation &,.9.* 12.2B12 . ewness /-.13BB22 "urtosis 1.;)BB)4

ln of government expenditure* 11.2B--B 11.32(2; 12.;1121 ).B23;()

ln of consumer price index B.-B24;( 4.)B(2(; ;.22-4B2 4.2B;)4) -.41--;B ).314 -.;-(-1( 2.B)4(3( 2.32;);2 &-.1)-144*

ln of gross fiscal deficit 1-.12342 1-.3)1-12.B(B22 ;.23((2B 1.4B132B 14.314 /-.2);2)4 1.)(4;2.(4B2(( &-.22)-4(*

7n of 82 1-.322)B 1-.2421( 12.14;;B ;.(-211) 1.4BB--2 14.-222 -.124B21 1.;B((2( 2.4B12(4 &-.2;;)4;*

Marque/0era 2.421(;2 &?robability* &-.2)1(B1* .ource6 ,ompiled by the :uthor$s.

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!esult of regression analysis presented in table 2 shows that inflation is not a significant variable which affects the fiscal deficit in #ndia, while money supply is negatively associated and government expenditure is positively associated with the fiscal deficit. This implies that as money supply increases fiscal deficit will decrease and as government expenditure increases fiscal deficit will increase. !amsey$s !1.1T test of omitted variable indicates that all explanatory variables have been included in the model and specification of the model is correct. The estimated value of F/test being insignificant implies that data do not support to reAect null hypothesis of omitted variables and misspecification of the model. 'ata does not support to reAect null hypothesis of constant variance implying that heteros edasticity does not exist. #t is evident from 0reusch/?agan test of heteros edasticity. 'urbin/%atson &'/%* value indicates that positive first order autocorrelation does not exist. 0ut problem of multicollinearity is very severe as 9ariance #nflation Factor &9#F* is very high for the three independent variables.

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Table 2 Results of regression analysis

'ependent 9ariable6 ln of gross fiscal deficit 9ariable , ln of @overnment 1xpenditure ln of consumer price index .td. 1rror ,oefficient &.. 1* /2.B(22; -.24B2B( 1.(1)B2; -.-1(;22 -.11B4;) -.-342-4 t/.tatistic /1-.4-BN 1B.34)-N ;4.21 -.324232 1.2B ln of money supply /-.)432B -.1-()3( Ndenotes significant at 1P level. .ource6 ,ompiled by the :uthor$s. /;.;;;4N 'urbin/%atson &'%* statF 1.(;2B() : ai e #nformation criteria/ .chwar5 #nformation criteriaF /1.2B)12B// 1.-(;414 9#F ;;.22 :dAusted !/ squared &.. 1* -.((2)B; &-.1222;;* 0reusch/?agan for heteros edasticity chi2&1* F (.)4 ?rob O chi2 F -.--1; !amsey$s !1.1T test F&2, 22* F -.22 ?rob OF F -.)11(

F/statistic F 2-42.;;(N

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To minimi5e the problem of multicollinearity first we have done regression analysis using mean deviation of all variables and we found that yet this approach has reduced the 9#F1 however, these reduced 9#F values were also too high then to avoid problem of multicollinearity on one hand also to avoid the problem of nonstationary property of data &as data used for analysis is time series* for all variables first difference of all variables2 has been ta en and then regression analysis has been carried out. !esult of the regression analysis of first difference form as presented in table 2 shows similar results as obtained from earlier analysis. #n this case we can see that now 9#F has considerably declined indicating that a very small degree of multicollinearity exists. Further, to ta e into account the time effect, constant term in first difference model has been introduced and again analysis has been carried out. !esult has been presented in table 3. #t is found that time is also important factor which affects fiscal deficit. #n this case also heteros edasticity, multicollinearity and autocorrelation do not exist. !amsey$s !1.1T test indicates that no variable is omitted from the empirical estimation and model is not miss/specified.

!esults of regression analysis carried out for variables using deviation from mean will be available upon request to the authors.

2 Results of unit root analysis {using (Augmented) Dickey-Fuller (DF/ADF) test statistic and PhillipsPerron (PP) test statistic} have been presented in annexure 3 which shows that all variables are nonstationary in level form and in first difference form they are stationary.

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,able 3 -esults of regression analysis based on first difference

'ependent 9ariable6 ' &ln of gross fiscal deficit* .td. :dAusted !/squared : ai e #nformation 1rror &.. 1* criteria/.chwar5 Q 9ariable ,oefficient &.. 1* t/.tatistic 9#F #nformation criteria F ' &ln of 2.13 -.22B(32 &-.1B(2)3* /-.B2;B2B//-.4-)242 @overnment -.2;B1 1xpenditure* 1.;12B2) (1 B.2--(23N ' &ln of 2.12 consumer price -.-(42 index* -.--11-2 13 -.-114B3 ' &ln of money -.23;; 1.-2 'urbin/%atson &'/ supply* /-.B1-B2) ;) /2.3B34N1 %* stat F 2.1)B233 Ndenotes significant at 1P level. ' denotes first difference of variables. Qdenotes that in this case 9#F has been calculated on the basis of uncentered variance inflation factor as constant term do not exist. .ource6 ,ompiled by the :uthor$s

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,able + -esults of regression analysis based on first difference with constant

'ependent 9ariable6 ' &ln of gross fiscal deficit* .td. 1rror &.. 9ariable ,oefficient 1* t/.tatistic , /-.-12334 -.1--2(2 /-.122(N ' &ln of @overnment 1xpenditure* 1.;;21B3 -.42431- 2.2;2(1B ' &ln of consumer price index* -.---12( -.-(B(3; -.--132( :dAusted !/ squared &.. 1* -.2-;412 &-.1;1)12* 0reusch/?agan for !amsey$s heteros edasticity !1.1T test

9#F

chi2&1* F F&2, 2.1; 21* F 1.(; 1.12 ?rob O chi2 F ?rob O F F -.12(3 -.13-B 1.11 'urbin/ : ai e %atson #nformation &'%* statF criteria/ .chwar5 #nformation 1.-1 2.1(4(); F/statistic F ' &ln of criteriaF B.3;B)43N money /-.4)4421// -.312143 supply* /-.4;)2B2 -.23);21 /1.B4)NN Nand NNdenotes significant at 1P and 4P level respectively. K'L denotes first difference of variables. .ource6 ,ompiled by the :uthor$s.

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Finally, actual, fitted &estimated* value of gross fiscal deficit and residual plot has been drawn to show the goodness fit of the model for both specifications i.e., when first difference of all variables is ta en for analysis and constant term does not exist and when it exists. @raphs drawn for both specifications show that model fits good and residuals fluctuates around mean 5ero line. .igure / *oodness fit of the model when first difference of all variables is ta0en for analysis and constant term is discarded.

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.igure 1 *oodness fit of the model when first difference of all variables is ta0en for analysis and constant term is included.

/. 2onclusions #t has been witnessed that over the years particularly in the last decade not only burden of fiscal deficit has increased but also mounting inflation rate. @overnment expenditure has also increased the pressure of the burden on ,entral government. :s for as money supply is concerned, annual growth rate of money supply has remained more or less constant. +owever, money supply in absolute terms has increased. The test for stationarity using :ugmented 'ic ey/Fuller &:'F* and ?hillip/?erron &??* test proved that the variables used in this study are nonstationary in their level forms. !esult obtained from empirical analysis shows that the important variables which are affecting fiscal deficit are money supply and mounting government expenditure, while inflation does not count for fiscal deficit significantly1. #nterestingly, we find from regression
#n regression analysis testing of hypothesis is done through the testing the significance of coefficients of the variables through t/test. This one can see from the significance of
1

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analysis that money supply is negatively associated and government expenditure is positively associated with the fiscal deficit. This implies that as money supply increases fiscal deficit will decrease and as government expenditure increases fiscal deficit will increase. This implies that while on one hand financing of deficit through the ban ing system from printing of new money and creating interest/ bearing decreases fiscal deficit, on the other hand increasing government expenditure is the main cause of mounting fiscal deficit. This may be due to deficient and inefficient social programs as Tan5i &2---* have found that in 7atin :merican countries disequilibrium between public budget and budget deficit results from governments$ wrong policies such as using borrowing in order to finance the deficit as 1geli &2---* have found. Therefore, to analyses this issue in depth one can go for empirical analysis in this direction for #ndia and also present study can be extended by analy5ing the impact of different types of government expenditure and ,onsumer ?rice #ndex &,?#* on fiscal deficit which may give more insights about the problem.

coefficients of respective variables in all regression models employed in the analysis. #n all models, coefficients of money supply and government expenditure are significant implying that the data do not supports to accept the null hypothesis, which implies that we can accept the alternative hypothesis. +owever, data do not provide sufficient evidence to reAect or not to accept the null hypothesis for variable inflation in statistical terms.

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The Romanian Economic Journal 3nne$ure 1: ,able of 4ercentage growth rates

Dear

?ercentage ?ercentage annual ?ercentage ?ercentage annual annual growth growth rate of annual growth growth rate of rate of ,?# fiscal deficit rate of 82 government expenditure 1.-2-(2) 1-.;132( 21.1()1B 23.B--;B /2.(43) /12.)224 1-.4)-2 /2.1B-3( (.13)2B4 13.1B1)4 ).13(4B2 22.B4B24 2B.1;244 /2-.3B)1 22.)2223 21.4)122 24.41((; /2.2-))3 44.1B2-3 11.(32(B 2(.)231; 21.2-2;4 13.31-22 1B.2423) 1(.)34;; 12.B142( 12.3;42( 1(.);(24 1(.(142 2-.2(123 2-.1(432 1B.2)1(( 1;.23B23 22.43B22 13.--1;3 3.4(3B2( 2-.(-422 23.4);2B 1-.222(3 12.42))3 21.-2312 1.-33332 2-.-;1;2 14.2B2)3

156'761 1561762 1562763 156376+ 156+76/ 156/761 1561766 1566768 1568765 156578' 158'781 ?ercentage annual average

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growth rate 1581782 12.3-4-B 3.32222 1;.21(2( 1582783 4.1)-1) 22.B2)BB 13.4)B(( 158378+ 11.23(-3 22.B1221 1;.B-3( 158+78/ -.1(22-) 22.BB-;) 1).2B4;B 158/781 3.;()3B3 24.4-42) 1B.4)113 1581786 3.;B1(-4 2-.41322 1;.B-2B( 1586788 (.(B4-24 2.BB3(3B 1;.2B242 1588785 12.44(B2 13.2322( 1;.2)2)1 158575' 4.2B;222 14.22)14 1(.-14)3 155'751 ;.B3-;41 24.24)1( 1B.BB3-2 .ource6 +and 0oo of .tatistics &!0#* and compiled by the :uthor$s

1-.(B;14 21.);21B 14.3-2)4 22.;)(33 2-.;-3(( 1(.3B22; ).3(4343 14.)(3); 1;.33--4 12.224;;

Year XIV, no. 42

December 2011

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The Romanian Economic Journal 3nne$ure 2: *raphical presentation of the variables

Figure 1 F @ross fiscal deficit

Figure 2 F @overnment expenditure

The Romanian Economic Journal Figure 2 F 8oney supply

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Figure 3 F #nflation

Year XIV, no. 42

December 2011

The Romanian Economic Journal 3nne$ure 3: -esults of unit root analysis 9ariables Rnit root test statistics ,ons ,onstant 'F/:'F tant and Trend & *Q @=9T1W?1<' ///// Des /1.(2B;)2 #TR!1 '&@=9T1W?1 Des ////// /4.3(214BN <'#TR!1* 7,?# ///// Des /2.-2;341 '&7,?#* Des ////// /4.()(;33N ?? & *^

158

/1.(22;1B &2* /4.334;B3N /2.-2;341 /4.()(422N &2*

7@!=..F#,#:7 ///// Des /2.2);-)/2.2);-)'1F#,#T '&7@!=..F#,# Des ////// /B.-)21)-N /B.-2(422N &1* :7'1F#,#T* 782 ///// Des /1.(2BB11 /1.(2BB11 '&782* Des //// /B.2()24(N /B.2-3B43N &2* Ndenotes significant at 1P level. K L denotes lag length used to avoid problem of serial correlation. K'L denotes first difference of the variable. KQL denotes maximum lag selection is based on .#,. K^L denotes <ewey/%est using 0artlett ernel method has been used to select appropriate lag length. ,ritical values of 'F/:'F test for level form are /3.21(12B, /2.422-)2, /2.1()212 at 1P, 4P and 1-P level of significance respectively and critical values of 'F/:'F test for first difference form are /2.B21-22, 2.(3232;, 2.B1-2B2 at 1P, 4P and 1-P level of significance respectively. ,ritical values of ?? test for level form are /3.21(12B, /2.422-)2, /2.1()212 at 1P, 4P and 1-P level of significance respectively and critical values for ?? test for first difference are /2.B21-22, /2.(3232;, /2.B1-2B2 at 1P, 4P and 1-P level of significance respectively. Year XIV, no. 42 December 2011