75 implied that public spending promotes economic development in Cyprus.
However, deficit financing by the government causes more liquidity effects/increases money supply but also inflationary pressure in the economy.
Results show that inflation negatively effects economic growth probably due to adverse supply shock. Money supply should be allowed to grow according to the real output of the economy but excess growth of money causes inflationary pressure in case of Cyprus. Zuze (2012) appraised the relationship between budget deficit, money growth and inflation in Zimbabwe for the period 1980-2007. The study employed Vector Auto Regression (VAR) model coupled with variance decomposition and impulse response functions to analyse the relationship. The regression results reveal that there is a positive relationship between budget deficit and money growth and also a positive relationship between money growth and inflation. Umeora and Ikeora (2016) investigated the effects of government fiscal deficits on money supply in Nigeria. Data for the study are secondary data set for 1970 – 2014 obtained from CBN Statistical Bulletin. The method of analysis was Error Correction Model (ECM) and Pairwise Granger Causality. The regression results showed that government fiscal deficits have significant and negative effect on money supply and that inflation does not contribute significantly to money supply and fiscal deficits. Pairwise Granger Causality was that money supply granger cause fiscal deficits.
76 causality and Vector Error Correction Model. The result of the Johansen co-integration established a long run relationship between fiscal deficit and inflation, while the granger causality impact assessment result showed that fiscal deficit does not significantly influence inflation in Nigeria. Umeora (2013) examined the relationship that exists between the Government Deficit Spending and selected macroeconomic variables such as Gross Domestic Product (GDP), Exchange Rate, Inflation, Money Supply and Lending Interest Rate. The period covered is 1970 (when the civil war ended) and 2011.
Ordinary Least Squares (OLS) technique was adopted to analyse the relationships. The study concluded that Government Deficit Spending (GDS) has positive significant relationship with GDP. Government Deficit Spending also has positive significant relationship with Exchange Rate, Inflation, and Money Supply.
Dockery, Ezeabasili and Herbert (2012) used a modelling approach that incorporated the theory of co-integration and its implied vector error correction model to investigate the long term relationship between fiscal deficits and inflation for Nigeria, a country which has experienced very large fluctuations in the government fiscal deficits. The empirical results showed that there is a positive but insignificant relationship between fiscal deficits and inflation. The analysis of the Nigerian data also indicated a tenuous link to previous levels of fiscal deficits with inflation and provide, moreover, evidence of a positive long-run relationship between money supply growth and inflation, suggesting therefore that money supply growth is procyclical and tends to grow at a faster rate than the rate of inflation. Finally, from the impulse response and variance decomposition analysis, the study found that
77 the length of inflation is an important determinant of the ability of the system to return to its long-run equilibrium following a shock. Conventional notions suggest that persistently high budget deficits give rise to inflation, which monetary policy on its own is powerless to prevent hut empirical evidence does not provide convincing support for such a hypothesis hence, Oladipo and Akinbobola (2011) determined the nature and direction of causality between fiscal deficit and inflation in Nigeria. Data on inflation rate, exchange rate, Gross Domestic Product (GDP) and budget deficit were collected from statistical Bulletin of Central Bank of Nigeria. Granger Causality pair wise test was conducted in determining the causal relationship among the variables. The result showed that there was no causal relationship from inflation to budget deficit (F = 0.9, P > 0.005), while the causal relationship from budget deficit to inflation was significant (F = 3.6, P < 0.05). This implies that a unidirectional causality from budget deficit to inflation exist in Nigeria.
Nwakoby (2017) examined the effect of fiscal deficit on selected macroeconomic variables in Nigeria by specifically examining the effect of fiscal deficit on gross domestic product, money supply and inflation. To achieve these objectives, the study employed various econometric techniques such as unit root, Johansen co-integration, ordinary least square and granger causality test in which variations in gross domestic product, money supply and inflation were regressed on fiscal deficit and exchange rate using time series data from 1981 to 2015. The results of the analysis revealed that fiscal deficit has no significant effect on gross domestic product, money supply and inflation in Nigeria. Tiwari and Tiwari (2014) assessed the linkage between fiscal deficit and inflation in India by critically determining the factors that are
78 responsible for increasing fiscal deficit in India, by taking into account all factors that can affect the status of fiscal deficit. The study found that inflation is not at all cause of fiscal deficit but, government expenditure and money supply are found to be important determinants of mounting fiscal deficit.
Egbulonu and Wobilor (2016) analysed the relationship between fiscal policy and inflation rate in Nigeria from 1970 to 2013. Data on Government expenditure, government debt stock, government tax revenue and inflation rate were sourced from the National Bureau of for Statistics and Central Bank of Nigeria. The data were subjected to Unit root tests, Co-integration and Granger causality tests, and analysed using Ordinary Least Square (OLS) Regression and Error Correction Mechanism (ECM) techniques. The results found a statistically insignificant positive relationship between government expenditure; government tax revenue and inflation in Nigeria, while government debt stock is positive and statistically significant. The results also revealed that, there exist a long-run equilibrium relationship between inflation and fiscal policy in Nigeria. Rehman, Khan and Wahid (2016) focused on investigating the growth rate of government expenditure, taxes, budget deficit, GDP, employment rate and interest rate and its relationship with the inflation rate. For analysing the data for the period of 1980-2014 various techniques such as Multiple Regression, Ramsey RESET test, ARCH test, the ADF unit root test and white test, the paper concluded that four independent variables (growth rate of government expenditure, growth rate of GDP, interest rate and employment rate) are significant while the remaining two independent variables (growth rate of taxes and budget deficit) are insignificant. So, the impact of fiscal policy is great over inflation.
79 Kliem, Kriwoluzky and Sarferaz (2015) studied the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, they contrasted the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. They found that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, they used an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggested that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation. Mukhtar and Zakaria (2010) re-ascertained the issue in the case of Pakistan using Johansen co-integration analysis. The empirical results suggested that in the long-run inflation is not related to budget deficit but only to supply of money, and supply of money has no causal connection with budget deficit.
Tiwari, Bolat and Koçbulut (2015) tested the relationship between budget deficits and inflation for nine EU countries during the period of 1990-2013 using the quarterly data. The study employed the bootstrap causality and Granger causality test in the frequency domain analysis which allows us to distinguish short and long-run causality. The study did not find a relationship
80 between these variables when bootstrap causality analysis was applied. While the frequency domain causality showed that there is no relationship causality from budget deficits to inflation for all countries, causality from inflation to budget deficits indicates a permanent (long-run) relationship for Belgium, and France. Solomon and Wet (2004) explored the deficit-inflation relationship in the Tanzanian economy and established the causal link that runs from the budget deficit to the inflation rate using co-integration analysis over the period 1967-2001. Some dynamic simulations were done to gauge the effect of a change in the budget deficit and gross domestic product on inflation over time.
Due to monetisation of the budget deficit, significant inflationary effects are found for increases in the budget deficit.
Mehraraa, Masoumibb and Barkhi (2014) studied the effect of fiscal policy on economic growth and inflation by using government expenditure and taxes. For this purpose, selected data from developing countries were used for the period 1990-2011. PVAR approach was been applied to study the effect of shocks on macro variables. The results of impulse response function and variance decomposition implied that economic growth will increase through government expenditure shock in short term, but in long term it is the opposite. The government expenditure shock decrease inflation. Shock of taxes, in short run, promotes slightly economic growth and in long term have no effect on growth. Makochekanwa (2010) the deficit-inflation nexus in the Zimbabwean economy and establishes the causal link that runs from the budget deficit to the inflation rate using Johansen (1991, 1995) co-integration technique over the period 1980 – 2005.
81 Ekanayake (2012) investigated the validity of the hypothesis that suggests there is a link between fiscal deficits and inflation in developing countries and further explored this link in the absence of public sector wage expenditure. An auto-regressive distributed lag (ARDL) model was employed in the analysis, using annual data from 1959 to 2008. The results suggested that, in the long run, a one percentage point increase in the ratio of the fiscal deficit to narrow money is associated with about an 11 percentage point increase in inflation. This link becomes weaker in the absence of the public sector wage expenditure. The overall inference is that inflation is not only a monetary phenomenon in Sri Lanka and public sector wage expenditure is a key factor in explaining the deficit-inflation relationship. Zonuzi, Pourvaladi and Faraji (2011) re-examined the deficit-inflation nexus in the Iranian economy by using quarterly data for the period of 1990-2007. We employ Bounds test approach to co-integration proposed by Pesaran et al. (2001) to investigate the long-run relationship between budget deficit and inflation. The key findings from the empirical studies investigating the relationship between the budget deficit and inflation indicated strong evidence towards supporting a significant and positive relationship between budget deficit and inflation in Iran. At the end, we obtained volatility of budget deficit by using GARCH model, and showed that, volatility of budget deficit has a positive effect on the inflation too. Mehrara and Sujoudi (2015) looked into relationship between, inflation, money supply and government spending in Iran during the period 1959- 2010. To that end, Bayesian econometric approach was used. The results of the Bayesian Model averaging method implied that the growth rate of money, economic growth rate, inflation rate, the logarithm of the ratio of
82 liquidity to GDP, and growth in energy prices had a significant positive significant effect on inflation. The results also showed that the growth rate of government spending, GDP growth rate and the exchange rate had no significant effect on the inflation. Ozurumba (2012) evaluated causal relationship between inflation and fiscal deficits in Nigeria, covering the period 1970-2009. The estimation technique used was the autoregressive distributed lag (ARDL) model and the Granger-causality test. The result of the Granger-causality test showed that the null hypothesis which says that fiscal deficit does not cause inflation should be rejected since the result is significant with probability less than 0.05. This implies that fiscal deficit causes inflation but, no feedback mechanism was observed, while results from the ARDL test confirm a significant negative relationship between growth in fiscal deficit and inflation.