THE NEXUS BETWEEN PUBLIC EXPENDITURE AND INFLATION IN THE MEDITERRANEAN COUNTRIES
THE NEXUS BETWEEN PUBLIC EXPENDITURE AND INFLATION IN THE MEDITERRANEAN COUNTRIES

Summary/Abstract: The aim of this article is to assess the empirical evidence of the nexus between public expenditure and inflation for the Mediterranean countries during the period 1970-2009, using a time-series approach. After a brief introduction, a concise survey of the economic literature on this issue is shown, before discussing the data and introducing some econometric techniques. Stationarity tests reveal, generally, that public expenditure/GDP ratio is a I(1) process, while prices index is a I(2) process. Moreover, a long-run relationship between the share of public expenditure and inflation is found for Cyprus, France, Greece and Portugal. Furthermore, Granger causality tests results show a short-run evidence of a directional flow from inflation to expenditure for Cyprus, France and Spain; and of a bidirectional flow for Italy, Malta and Portugal. Some notes on the policy implications of our empirical results conclude the paper.

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