The relationship between government deficits, money growthm and inflation

Abstract

We model the time-series relationship between Federal government deficits, base-money growth, and inflation as a trivariate autoregressive process. The technique is a generalization of Hsiao's (1979; 1981) bivariate autoregressive modeling method, but also incorporates several recent contributions by Caines, Keng, and Sethi (1981) and Lutkepohl (1982). The results indicate that for the 1960s, both government deficits and inflation are econometrically exogenous. But, for the 1950s and the 1970s, government deficits, money growth, and inflation are all causally related.