Dynamics of Inflation and Remittances on Economic Growth in Liberia: A Granger Causality Approach

Abstract

Inflation and economic growth relationship remain an extensive theoretical and empirical debate in developing countries with regards to monetary policy. The study examines the nexus among economic growth, remittance and inflation in Liberia. The study employed the Granger Causality test to identify if changes in variable of interest temporally precede changes in another, was considered. The VECM specification and result shows a cointegrating equation which indicate a statistically significant long run relationship. The second lag of GDP is positively affecting economic growth significantly. Lag one of inflation showed a significant and positive relation with GDP, hence inflation positively affect economic growth. The result of the VEC Granger Causality/Block exogeneity Wald tests below show Inflation Granger causes GDP in Liberia which is consistent with our ECM result. The result also showed remittance Granger cause GDP in Liberia while inflation Granger causes remittance in the Liberian economy. In conclusion, the study shows that inflation and remit granger caused GDP at a significant level and inflation granger cause remit, hence there is unidirectional causality from inflation to GDP, and from inflation to remit in Liberia.