Empirical Investigation Relationships Between Money Supply, Government Expenditures, Prices And Output In Uzbekistan

Abstract

This paper investigates the long run as well the short run relationships between money supply, inflation, government expenditure and economic growth using the Granger causality test and Error Correction model (ECM) for the case of Uzbekistan on the basis of time series data from 1997 to 2019. The empirical results show that government expenditure promotes economic growth in Uzbekistan while inflation negatively effects economic growth because adverse supply shock. Money supply has long-run unidirectional causal impact on economic growth, implying that supply-leading hypothesis for finance-growth nexus is supported in Uzbekistan. However, this causal impact only exists if either price level or government spending is considered in estimation. In short run, money supply, price level and government spending are found to have negative impact on real GDP, but as number of lags increases or time pass the impact become insignificant. These findings suggest that when examining the relationship between money supply and economic growth other economic variables should be taken into account. Although monetary expansion is found to create inflationary pressure, this does not overwhelm. Thus,  based  on  the  results  of  the  study, monetary policy should be planned to maintain price stability by  controlling  the  growth  of  money  supply  in  the  economy.  Also combined efforts should be made by policy maker to increase the supply of output so as to reduce the prices of goods and services and boost the growth of the economy.