Academic journal article Journal of Financial Management & Analysis

Financial Management Indicators to Aid Decision Making (Statistics)

Academic journal article Journal of Financial Management & Analysis

Financial Management Indicators to Aid Decision Making (Statistics)

Article excerpt

Monitored by

Om Sai Ram Centre for Financial Management Research

Mumbai, INDIA

SPECIAL STATISTICS ON DIAGNOSIS OF ROOTCAUSE OF INFLATION PROBLEM AND CONSEQUENTIAL EFFECTS ON MACROECONOMIC ADJUSTMENT

STATISTICS 1

A. TESTING OF THE KUMARA SWAMY THEOREM OF INFLATIONARY GAP IN SELECTED COUNTRIES AND TRADE BLOCS

(by Bauer, Faseruk, Glew, Lazaridis, Livanis, Swamy)*

Introduction

Financial economists have long postulated about the relationship between various economic variables, such as the level of economic activity (often as evidenced by growth in GNP), growth of the money supply and, of course, the most persistent problem that has plagued many economies since the 1960s, viz., inflation. In order to explain the relationship between these variables, Professor M.R Kumara Swarny proposed the unique and well-researched Kumara Swamy Theorem of Inflationary Gap in his convocation lecture on Inflation and Economic Development of Nigeria delivered at the Institute of Management and Technology, Enugu, Nigeria on March 3, 1978. This Theorem states.

The growth of the money supply in a country must be twice the growth of real output to maintain price stability. Thus the difference between money supply and real output is the actual inflationary gap, while the permissible inflationary gap is the difference between real output and double (permissible) money supply. The excess of the actual gap over the permissible gap is referred to inflationary gap caused noneconomic development factors like maintenance of unproductive enterprises (non-performing assets) and we may add corruption and fraud premiums'.

This Theorem was successfully tested for the Nigerian economy by Professor Swamy: 1984, Lazaridis and Livanis tested the Theorem outside developing world in Europe during-the ongoing international financial crisis. Inflation has accelerated internationally due to persistence of high oil prices and increases in food prices fueled by these high oil prices and shortages of several foodstuffs for a variety of reasons, notably growth in population, increased consumption by emerging middile classes in China and India, and drought conditions in Africa and North America during 2012. Lazaridis and Livanis investigated the Kumara Swamy Theorem of Inflationary Gap for the Cypriot and Greek economies over the period 2004-2009 and found favourable results and Swamy tested for the Nigerian economy.

CYPRUS

FUNCTIONAL RELATIONSHIP BETWEEN THE KUMARASWAMY MEASURE OF EXCESS INFLATIONARY GAP AND PRICES : CYPRUS

Cyprus : We can see that during the period 2004-2007 the excess inflationary gap exceeds consumer prices growth indicating stagflation for cypriot economy.

GREECE

FUNCTIONAL RELATIONSHIP BETWEEN THE KUMARA SWAMY MEASURE OF EXCESS INFLATIONARY GAP AND PRICES : GREECE FIGURE 2

GREECE : On the other hand, the results for the Greek economy are mixed. As we can see from the above table during the period 2004-2005 the average actual inflationary gap was 8.53 per cent while the average permissible inflationary gap was 2.58 per cent creating an excess inflationary gap (5.95 per cent). For the period 2006-2008 the average actual Inflationary gap was -4.77 per cent while the average permissible inflationary gap was 2.88 per cent. Finally, for the last year (2009) the actual inflationary gap was 10.73 per cent while the permissible Inflationary gap was -1.37 per cent creating an excess inflationary gap (12.10 per cent). According to the above results the excessive money supply growth needed to be checked for the years 2004, 2005 and 2009.

For the Greek economy stagflation is indicated only for 2004-2005. From 2009 the Greek economy seems to be facing again stagflation. Actually, Greece has entered into deep economic recession, reducing productivity, increasing unemployment and continuing inc.rease in prices of most products and services. Tackling stagflation seems difficult as Greece is obliged from International Monetary Fund to take tough economic measures. …

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