Money, Exchange Rate, Prices Links during Hyperinflationary Episodes in Developing Economies : Using Hsiao's approach to Granger non-causality test

Abstract

The determination of the causal pattern among inflation, money growth, and exchange rate has important implications for policymakers regarding appropriate stabilization policies in developing economies. Using Congolese data where the pace of broad money growth and hyperinflation (23, 760% annual change) reached record levels in early 1990s, we use single-equation multivariate autoregressive models with the optimal lag selected using Hsiao’s approach to Granger causality. Results indicate feedback causality between inflation and money growth on one side, and unidirectional Granger causality from money growth to the exchange rate and from the exchange rate to inflation on the other. These results suggest that the over-riding goal of disinflation needs to be accomplished initially by exchange rate stabilization, followed by a direct inflation targeting.