Output Growth, Money Supply and Inflation in a War-torn Economy: Evidence from Sierra Leone
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Date
1996-06
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A.A.U
Abstract
Using annual time series data from 1966 to 1994 f or a war-ravaged economy like Sierra
Leone, the paper attempts to establish, via the direct Granger approach, a relationship between
money and output on the one hand, and between each of these macroeconomic variables and prices
on the other. From the econometric results, it is apparent that a positive feedback relationship
exists between money growth and inflation, while a one-way causal relation exists between output
growth and inflation with the strand of causation running from output to prices. It is suggested that
the feedback which occur between money growth and inflation is attributable to the lags in revenue
collection which allow the government to prompt the monetary authorities to create further money.
The additional money created results in excess demand and a rise in general prices of goods and
services. Consequently, this rise in general prices leads to increased fiscal deficits which the
government finance by creating additional money. In addition, output growth granger-causes
money growth and money growth granger-causes output growth in the economy. The later,
however, occurs without a definite pattern indicating a divergence between the results of this study
and those obtained by Barro (1978).
Apart from investigating the casual relation among output, money and prices, this paper
also examines the behavior of these macroeconomic variables with the aid of the Engle-Granger
(1987) two-step estimation procedure. The effect of unanticipated money growth on output growth
in the long-run and short-run was also considered in the analysis. Our findings with regards to
the effect of unanticipated money growth on output do not lend support to Barro's (1978) claim
that output increases with an increase in unexpected money growth. The impact of the rebel war
on real output growth and general prices of goods and services was examined via the use of a
dummy. From the empirical results it was observed that the rebel war contributes the rising
prices of goods and the stifling of real economic activities, albeit insignificantly. The stifling of
real economic activities arises from the massive outflow of capital and the collapse of investment
activities due to insecurity. Policies which focus on reducing insecurity so as to boost domestic
investment and output growth were therefore suggested.
With the aid of the DF and ADF tests, this study also attempts to examine the nature of
the inflation series in Sierra Leone. T7,e findings suggest that inflation follows a trend-stationary
process rather than a difference-stationary process implying that shocks, both domestic and
external, have a temporary effect on inflation
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Evidence From Sierra Leone, Money Supply and Inflation in a War-Torn Economy: