Post on 19-Mar-2020
transcript
W19 L
INFLATION IN VENEZUELA: THE CASE
FOR NO SINGLE CAUSE
THESIS
Presented to the Graduate Council of the
North Texas State. University in Partial
Fulfillment of the Requirements
For the Degree of
MASTER OF SCIENCE
By
Florangel Rodriguez, B.S.
Denton, Texas
December, 1987
Rodriguez, Florangel, Inflation in Venezuela: The
Case for No Single Cause. Master of Science (Interdisci-
plinary Studies), December, 1987, 44 pp., 4 tables,
bibliography, 18 titles.
The study was designed to examine the causal relation-
ship between the Venezuelan inflation and the monetarist
variables--money supply--and the structuralist variables--
exchange rate and balance of payments. The data (1964-1982)
was gathered from the International Financial Statistic
Yearbook, 1983 and the Statistical Yearbook, 1974, 1982.
Chapter I is an introduction to the research problem.
Chapter II does a review of the related literature. Chapter
III deals with the methods and procedures for treating the
data. Chapter IV presents an statistical analysis of the
data. And, Chapter V contains a summary of the study and
its findings, conclusions and recommendations.
The study only found a significant relationship between
inflation and the monetarist variables money supply and GNP,
though supporting the monetarist theory.
A similar investigation is suggested, but selecting a
longer time period, other.variables, and more refined
methodologies and analysis.
TABLE OF CONTENTS
PageLIST OF TABLES. .i.......... .. . . . . .. a
Chapter
I. INTRODUCTION.. ........... .
Background and SignificancePurpose of the StudyStatement of the ProbleymHypothesesDefinition of Terms
II. REVIEW OF THE RELATED LITERATURE ........ 12
III. METHODS AND PROCEDURES......... ......... 20
The DataProcedures for Treating Data
IV. ANALYSIS OF THE DATA. ..... . .. . .. .25
IntroductionTime Series Regression Analysis
V. SUMMARY, FINDINGS, CONCLUSIONS, ANDRECOMMENDATIONS..... . .... ... 31
SummaryFindingsConclusionsRecommendations
APPENDICES*..................... ....... ........ 38
BIBLIOGRAPHY. ......... ..................... 42
iii
LIST OF TABLES
Table Page
I. Description of the Variables........... 21
II. Multiple Regression Results Betweenthe Dependent Variable (CIP) andthe Independent Variables (Money,GNP, . . . Yr) ..*.......................26
III. Operational Hypotheses.......... .... W..... 39
IV. Data for the Study.............. . ........... 41
iv
CHAPTER I
INTRODUCTION
Background and Significance
Inflation is one of the great evils of our time. It
is a major concept related to many other terms and concepts
in macroeconomics (e.g., price level, business cycles,
business cycle phases). A simple and clear definition of
inflation (the one utilized in this research) is the
following: "A continuously rising general price level,
resulting in a loss of the purchasing power of money"
(4, p. 130). Inflation is usually measured through a
price index--weighted average of a range of prices in
the economy.
Continuously rising prices are a world-wide problem
which has existed for more than a generation. Some
economies and societies are more sensitive to rising
prices and costs than others. However, nations seek,
in their own ways, to cope and protect themselves
against the relative damage historically high inflation
rates inflict (13, p. 8). Inflation is inequitable.
It has the effect of favoring higher income groups,
thus making the distribution of income and wealth
less equal. Some groups are in a better position
1
2
because of special skills, market power, or political power
to protect their real income. The most disadvantaged group
is the one whose income is fixed in money terms. Inflation
can also be regarded as a kind of tax which reduces
purchasing power, as all taxes do. It is a very
discriminatory tax, falling unequally on different groups of
taxpayers in the economy. The government gains by being
able to increase its noninterest-bearing debt and because
many tax rates are based on nominal income. Inflation
causes the economic system to operate inefficiently. It
distorts pricing, planning, resource allocation and
investment decisions. Production and investment are lowered
because change in the value of money causes poor decisions
to be made. A diversion of resources takes place, including
entrepreneurial talents from productive employment to
nonproductive speculation. Improperly calculated interest
and discount rates bias investment decisions. The demand
for physical assets increases and the demand for financial
assets decreases. There is a flight from all financial
assets into physical goods. Long-term commitments are
avoided and investment projects become unattractive.
Inflation also negatively affects a nation's international
trade balance. Foreign importers shift their preferences
elsewhere when the price of a country's products are rising
relative to those of other countries. This causes a decline
3
in the nation's exports and, at the same time, an increase
in the nation's imports as the products of other countries
look increasingly attractive to national buyers. Should
this tendency persist very long, the nation would be forced
to devaluate its currency in international trade which can
bring serious repercussions. Inflation and its corrosive
effects on society have not been the monopoly of a few
countries but a world wide phenomenon. Indeed, it is found
in all types of societies, at any stage of economic
development, under different kinds of government and
political ideologies. Inflationary factors in Latin America
assume particular importance since this region has been
more plagued by inflation than elsewhere. Most Latin
American regions, except for a small group of countries,
have suffered from very high rates of inflation since the
beginning of the century. In the case of Venezuela,
inflation remained unknown and hidden until its strong
appearance in 1974. From then on, the country's economy
has exhibited a deteriorating trend that has brought about
rising prices, stagnation, balance of payments problems,
increasing foreign debt and develuation of its currency.
In this investigation of Venezuelan inflation, two
contending schools of thought are identified in order to
survey and test their theories about the nature of the
determinants of inflation in this country. One is the
4
"Latin American monetarist," which states that inflation is
the result of continued expansion of aggregate demand after
real income approaches the capacity or supply constraints of
the economy. This inflation is generated by unjustified
expansion both in government deficits (financed for the
most part by increases in the money supply) and in central
bank loans to the public and commercial banks. Due to
the weakness of government bond markets, little expansion
in aggregate demand occurs without concomitant growth in
money supply. Thus, increases in the money supply accompany
expansionary fiscal policy as well as expansionary monetary
policy. The other school of thought is the "Latin American
structuralists." They agree that monetary expansion is a
propagating factor in inflation. They feel that more
fundamental, structural causes are at the root of the
inflationary process. The basic source of rising prices is,
in general terms, the pressure of economic growth on an
underdeveloped social and economic structure, in particular,
the agriculture, foreign trade, and government sectors (14).
Purpose of the Study
The purpose of this study is to test and analyze the
monetary and structural factors responsible for the
Venezuelan inflation for the years 1964 through 1982. The
economic literature on inflation in several other Latin
5
American countries (Brazil, Argentina, Mexico, Chile) is
vast. However, that is not the case for Venezuela which
makes this study of considerable interest and usefulness
in understanding the country's recent inflationary
phenomenon. In order to offer the best possible explanation,
this study views Venezuelan inflation as an interaction of
several different monetarist and structural factors.
Statement of the Problemrv
This study was designed to examine the causal rela-
tionship between the Venezuelan inflation and the monetarist
variable--money supply--and between inflation and the
structuralist variable--the exchange rate. The critical
and unavoidable question following the problem is:
Would an experimental design (empirical findings) support
the following assumptions?
1. Inflation is originated by a more rapid increase
in the money supply than in real output. The excess
supply of money ends up as an excess demand for current
goods and services, and prices must rise until the demand
and supply for money are once again in equilibrium (9).
Therefore, inflation results from a continued rise in
the money supply.
2. Economies that experience lower rates of output
growth tend to have higher rates of inflation because they
6
cannot assimilate most of their monetary growth. Thus,
inflation is related to poor or slower real output growth.
3. An increase in the money supply would initially
reduce interest rates. This excess supply of money leads to
increasing aggregate demand and income which would increase
the demand for loans and also liquidity preference.
However, even in the short run, some price increases would
also occur. In the long run, inflationary expectations
catch up with actual inflation, and nominal interest rates
end up higher than they started (9). Therefore, interest
rates and the inflation rate are related to some extent.
4. Inflation is more likely to occur when unemployment
falls very low. However, a small rise in unemployment is
less likely to restrain inflation when the economy is
operating below capacity than when the economy is operating
nearer to full employment (12). Thus, changes in the
unemployment rate have some influence on the inflation rate.
5. There is a causal link between changes in domestic
prices and changes of the exchange rate. Exchange rate
depreciation causes internal prices to rise, and exchange
rate appreciation causes internal prices to fall.
Therefore, inflation and exchange rate movements bear a
functional relation to one another (14).
6. When a country runs a chronic balance of payments
surplus, its currency is undervalued. Thus, its exchange
7
rate will appreciate causing a reduction of the inflation
rate. On the other hand, if the country experiences a
chronic balance of payments deficit, its currency is
overvalued. Therefore, its exchange rate will depreciate
and will consequently drive the inflation rate up. Thus,
there is a causal influence between the balance of payments
and inflation.
Hypotheses
From the assumptions above, the following hypotheses
were formulated:
Hypotheses I. There will be a significant positive
relationship between the money supply and the inflation
rate.
Hypothesis II. There will be a significant negative
relationship between real output (GNP) and the inflation
rate.
Hypotheses-III. There will be a significant positive
relationship between nominal interest rates and the
inflation rate.
Hypothesis IV. There will be a significant negative
relationship between unemployment and the inflation rate.
Hypothesis V. There will be a significant relationship
between the exchange rate and the inflation rate.
8
Hypothesis-VI. There will be a significant
relationship between the balance of payments (BOP) and the
inflation rate.
These hypotheses are shown in an operational form in
Appendix A, Table III.
Definition of Terms
Money Supply. A nation's money supply consists of
immediately available purchasing power in the hands of the
general public. It is some combination of currency (coins
and paper money), notes issued by governments or banks and
bank deposits (2, 4).
Real Output-or Real GNP. The total money value of
goods and services produced by an economy in a given period
of time, measured in constant prices, that is, current price
values corrected for inflation (7).
Interest-Rate. The price paid for the use of money
over time. Real interest rate is nominal interest rate
adjusted to reflect this interest yield minus the change in
prices (4).
Unemployment. The percentage of people in the labor
force who are not working. Those not seeking employment
(students, housewives, others) are not in the labor force
and thus not considered unemployed (4).
9
Exchange .Rate. The number of units of one country's
currency that exchanges for a unit of another country, the
domestic price of a unit of foreign currency (4, 7).
Depreciation of the Exchange -Rate. Any reduction
in the value of one currency relative to the value of
another after the relative value of the two currencies
have been fixed at an officially agreed upon level (4).
Appreciation of the Exchange-Rate. Any increase
in the value of one currency relative to the value of
another after the relative values of the two currencies
have been fixed at an officially agreed upon level (4).
Balance of Payments. For a country, balance of
payments is a summary of all economic transactions between
it and the rest of the world for a given period time.
Payments cover trade, services, or movements of financial
assets (4, 7).
Balance -of-Payments Trade. The difference between
merchandise exports and imports in a nation's balance
of payments. If exports exceed imports the balance of
payments is favorable, or in surplus, if imports exceed
exports the balance of payments is unfavorable, or in
deficit (11).
CHAPTER BIBLIOGRAPHY
1. Campos, R. 0., "Two Views on Inflation in LatinAmerica," in A. Hirschman (Ed.), Latin AmericanIssues, Twentieth Century Fund, 1961, pp. 69-79.
2. D.P.G., Reference Publishing, Inc., The Encyclopedia ofEconomics, Connecticut, D.P.G. ReferencePublishing, Inc., 1981.
3. Friedman, Irving S., Inflation a World Wide Disaster,Boston, Houghton Mifflin, 1973.
4. Greenwald, Douglas, The Encyclopedia of Economics, NewYork, McGraw Hill, 1982.
5. Hanson, James A., "The Short Run Relationship betweenGrowth and Inflation in Latin America: A QuasiRational or Consistent Expectations Approach,"American Economic Review, 70(5), 1980, pp. 972-989.
6. Jain, Chaman L., Contemporary Monetary Economics Theoryand Policy, New York, Graceway Publishing Company,1981.
7. Maisel, Sherman J., Macroeconomics---Theories andPolicies, New York, Norton, 1982.
8. Maynard, Geoffrey and W. Van Ryckeghem, A World ofInflation, New York, Barnes and Noble Books, 1975.
9. McCulloch, J. Huston, Money and Inflation: A MonetaristApproach, New York, Academic Press, 1975.
10. Morley, Samuel A., The Economics of Inflation, Hinsdale,Illinois, Dryden Press, 1971.
11. Pearce, David W., Dictionary of Modern Economics,Cambridge, Massachusetts, MIT Press, 1983.
12. Perkins, J.O.N., Unemployment, Inflation and NewMacroeconomic Policy, New York, St. Martin's Press,1 982.
10
11
13. Rodriguez, M. A., "Inflation, the Balance of Payments,and Real Output in Venezuela," unpublished DoctoralDissertation, Yale University, 1983.
14. Spaventa, Luigi, "Feedbacks Between Exchange RateMovements and Domestic Inflation: Vicious and Notso Virtuous Cycles Old and New," InternationalSocial Science Journal, 35 (3); 1983, pp. 517-535.
15. Vane, Howard and John L. Thompson, Monetarist, Theory,Evidence and Policy, New York, Wiley, 1979.
16. Wachter, Susan M., Latin American Inflation TheMonetarist-Structuralist Debate, Massachusetts,Lexington Books, 1976.
CHAPTER II
REVIEW OF THE RELATED LITERATURE
The predominant body of economic theory until the 1950s
was the classical one. It had been developed in the West,
addressing issues which were largely applicable and relevant
to those countries' conditions. Its assumptions of perfect
mobility of factors of production within each country, and
the clearing of markets through prices alone, may have some
reality with respect to Western nations, but certain Latin
American economists thought that this did not hold true for
their region.
So began the origins of the structuralist school in the
1950s, with Raul Prebisch's writings (1950) on the tendency
for Latin American countries' terms of trade to constantly
deteriorate. He said that the demand for industrial goods
(making up most of the West's exports) was such that
successful development of new products was comparatively
easy, once the market for a former product had been
saturated. In contrast, when a certain primary product
loses its market, it is practically doomed to extinction,
creating a serious terms of trade deterioration for the
(Latin American) exporting country.
12
13
Prebisch made a number of other important observations
and recommendations, which are not relevant to this
discussion. However, one could name him as the person who
provided the initial theoretical justifications of
structuralism, and introduced the idea of looking at Latin
American economies in a different way (6). The
structuralist school questions the concepts of cost-push and
demand-pull as the basic causes of inflation. It is said
that Latin America is replete with cases of factor
immobility, market imperfections, disequilibrium between
demand and supply in some sectors, and underutilization of
resources in the manufacturing sector. It is quite possible
to encounter bottlenecks in one area, and unemployment of
factors of production in another.
Sunkel, in his 1958 paper on Chilean inflation
identified three key bottlenecks. The inelastic supply of
foodstuffs, the foreign exchange shortage, and the domestic
budget constraint. In his opinion, the supply of
agricultural products is inelastic for several reasons. The
land tenure system is primarily divided into tiny peasant
plots (minifundia) and huge estates (latifundia). Peasants
are simply too poorly educated and poorly trained to be able
to take advantage of increased demand for their goods, while
the owners of the latifundias are not entrepreneurs in the
sense of a profit making propensity. The land has been in
14
the family, possibly for generations, and is held mainly for
prestige and demonstration of status. Hence, they too are
unresponsive to increased demand for agricultural goods.
When urbanization began in earnest some 30 years ago and the
market for foodstuffs greatly expanded, high inflation rates
became the norm (8).
Not all structuralists agree with this interpretation
though. Maynard (1961) believed that many Latin American
governments actively promoted industry at the expense of
agriculture by providing cheap credit and protection to the
former and turning the internal terms of trade against
agriculture (5).
The foreign exchange shortage is caused by the
composition of these countries' exports and imports. Latin
America relies mainly on the export of a few primary
commodities and imports a great amount of industrial goods.
The demand for primary products is elastic, due to the
relative availability of substitutes, whereas demand for
industrial goods is inelastic. This is the same as
Prebisch's argument that import prices have a strong
tendency to move up, while export prices tend to move down.
Clearly, this creates a persistent foreign exchange problem,
accompanied by inflationary import prices.
A third reason for structural inflation proposed by
Baer (1964) was the domestic budget. As the development
15
effort came into full swing, increased infrastructure was
needed, such as roads, social services, and new governmental
institutions. The government was the only establishment
capable of providing them. However, tax collection was
inefficient and governments had to resort to deficit
financing. As years passed, political considerations were
strengthened, these budget deficits continued, and inflation
followed this new institutional reality (1).
Finally, the structuralists argue that the price of
nonfood and nontradable goods are sticky, meaning they do
not decrease if their demand decreases. This occurs because
of factor immobilities and other institutional constraints.
Harberger (1963) and Friedman (1956) are probably the
most authoritative monetarist thinkers on the causes of
inflation in Latin America (3,4). Friedman (1956) applied
his theory of inflation worldwide, namely that a monetary
expansion due to government deficit spending and
expansionist credit policies raises the overall level of
economic activity, and that itself raises the price level.
The basic monetarist model is built on a stable demand
function for real money balances. They differ fundamentally
with the structuralists in that they assume money supply is
exogenuously determined by the authorities. Their response
to the inelasticity of food supplies is that governments
reacted to initial price increases by instituting controls
16
in order to protect the urban population from further price
increases and preempt any requests for wage increases. Such
interference in the operation of market forces acted as a
damper on incentives to produce more food, and the land
tenure system cannot be blamed for inflation.
As for the foreign exchange shortage, the monetarists
have a simple reply: the exchange rate in most Latin
American countries has been overvalued. This means imports
are artifically cheap, creating excess demand for foreign
goods, and exports are at a disadvantage, thereby reducing
demand for the domestic currency.
Monetarists thus acknowledged the existence of
bottlenecks, but attributed them to government induced price
controls and unjustified monetary expansion. De Olivera
Campos (1961) stated that stable and sustained growth can
only take place in an environment of monetary stability (2).
Harberger (1963) developed a model based on the liquidity
preference function where the price level is a function of
real income and a measure of previous inflation rates. He
tested his model on the Chilean economy, and concluded that
monetary expansion was the prime cause of inflation. In
another lecture delivered in 1978, he provided data to show
the same held true for Brazil, Argentina, and Uruguay (4).
Wachter (1976) provided a lucid critique of the
structuralist thought. She stated that in Chile, at least,
17
the prices of nonfarm goods have not been merely sticky but
have risen in the face of excess supply. The structuralists
have nothing to say about this. Second, she said the
increase in agricultural prices coupled with rigid nonfarm
prices can only account for a once-and-for-all overall price
rise, and not a constant one, as has been the case. Third,
she postulated that farm prices have risen in Chile in the
1940-1970 period, but not at an increasing rate, whereas
Chilean inflation rates themselves have been increasing.
Fourth, the structuralist school did not provide any sound
theoretical reasoning about why nonfarm prices were rigid.
She used the oligopolistic model of profit maximization to
substantiate her conclusions (9).
In recent years, structuralists have tried to
reformulate their original positions by introducing the
concept of imported inflation. They say three major factors
have given rise to imported inflation in the 1980s: a rapid
rise in the price of imported commodities; unprecedented
high interest rates in the first half of this decade; and
the forced reduction in imports and consequent supply
restrictions.
The problem with the structuralist model is that it
does not easily lend itself to any rigorous empirical
testing. Wachter and others have used the monetarist models
along with proxies for structural constraints to test the
18
validity of the structuralist school's ideas. Their results
have generally shown that institutional bottlenecks do have
an influence on inflation, so it seems the debate is still
open.
Miguel Antonio Rodriquez studied inflation in Venezuela
in 1983. He found no systematic relationship between the
increase in money supply and the inflation rate. However,
his structuralist model of inflation revealed that such
constraints had a bearing on Venezuelan inflation. His
thesis also showed that imported inflation and inflationary
expectations contributed significantly to price level
increases (7).
CHAPTER BIBLIOGRAPHY
1. Baer, W. and J. Kerstenetzky (Eds.), Inflation andGrowth in Latin America, New York, 1964.
2. Campos, R. 0., "Two Views on Inflation in LatinAmerica," in A. Hirschman (Ed.), Latin AmericanIssues, Twentieth Century Fund, 1961, pp. 69-70.
3. Friedman, M., Studies in the Quantity Theory of Money,Chicago, University of Chicago Press, 1956.
4. Harberger, A., "The Dynamics of Inflation in Chile," inMeasurements in Economics, edited by C. Christ,Stanford University Press, 1963, pp. 219-250.
5. Maynard, G., "Inflation and Growth: Some Lessons to beDrawn from Latin American Experiences," OxfordEconomic Papers, 13 (2), 1961, pp. 184-201.
6. Prebisch, Raul, The Economic Development of LatinAmerican and Its Principal Problems, New York,1950.
7. Rodriquez, M. A., "Inflation, the Balance of Payments,and Real Output in Venezuela," unpublished DoctoralDissertation, Yale University, 1983.
8. Sunkel, 0., "La Inflacion Chilena: Un EnfoqueHeterodoxo," El Trimestre Economico, 25 (4), 1958,pp. 570-599.
9. Wachter, S., Latin American Inflation theMonetarist-Structuralist Debate, Boston, LexingtonBooks, 1976.
19
CHAPTER III
METHODS AND PROCEDURES
In order to accomplish the purpose of this study,
certain approaches and methodologies were adopted. The
type of data and the appropriate statistical techniques
used to process that data and to test the hypotheses were
determined by the basic information available.
The Data
The data used in this study comprised one time series
gathered from the International Financial Statistic Year-
book, 1983 and the Statistical Yearbook, 1974, 1982. Each
data set consists of nineteen annual observations from
1964-1982 (see Table IV, Appendix B). The variables
included in this study are presented in Table I.
Procedures for Treating Data
The procedures followed in treating the data were:
1. The specific statistical technique employed
for both hypothesis testing and as empirical basis for
analyzing and interpreting the results was time series
regression analysis.
2. The statistical software that processed the data
in this study used a hierarchical multiple regression
20
21
TABLE I
DESCRIPTION OF THE VARIABLES
Measurement andVariable Name Data Source
DependentY
Independentxl
x2
x3
x4
x5
x6
x 7
Consumer Price Index(CPI). A measurementof the inflation rate
Money Supply (Money)
Real Output (GNP)
Interest Rate (i)
Unemployment (U)
Exchange Rate (ER)
Balance of Payments(BOP)
Year 1964-1982 (Yr)
Index numberreported in IMSs*
Bolivar (Nationalcurrency) volumeas published inIMSs*
Bolivar (Nationalcurrency) volumeas published inIMSs*
Rate as publishedin IMSs*
Rate as publishedin the statisticalyearbook**
Rate as publishedin IMSs*
Surplus or deficitas reported inIMSs*
Dummy variablecoded by theresearcher
**From Statistical Yearbook, 1974, 1982.
*From International Financial Statistics Yearbook,
1984.
22
technique. The full hierarchical procedure consisted of a
final regression equation which resulted from a sequenced
addition of causal variables to a simple regression equation
(one causal variable equation). The choice of a particular
sequence (hierarchy) was made by the researcher.
3. The time series regression model included a dummy
variable (X7) which represented the pre- (1964-1972) and
post-intervention (1973-1982) segments of the time series.
This dummy variable was coded by using the "I" - "0" dummying
technique (6, p. 66). Where X7 (Year) scored 1 if year was
after 1972, and 0 if otherwise.
4. The linear function developed from the procedures
outlined above was:
Yt = a + b1x1 + b22 + b3x3'+ h..7x7 + e
where:
Y= the dependent variable (CPI)
a = the intercept or constant term
b- bn = the regression coefficients
x- xn = the independent variables, and
et = the residuals or error term.
In time series of this sort, it is clear that auto-
correlation among the data may pose some problem of esti-
mation precision. Autocorrelation is defined as a
dependence (lack of randomness) among successive observations
23
about a single variable at different points in time
(5, p. 411). In order to avoid the impact of autocor-
relation on the quality of the inferences drawn from
empirical analysis, the Durbin-Watson test was employed
to test for its presence (8, p. 31).
CHAPTER BIBLIOGRAPHY
1. Cohen, Jacob and Patricia Cohen, Applied MultipleRegression/Correlation Analysis for the BehavioralSciences, New Jersey, Lawrence Earlbaum AssociatesPublishers, 1983.
2. Connor, L. R. and A. J. H. Morrell, Statistics in Theoryand Practice, London, Pitman, 1977.
3. Department of International Economic and Social Affairs,Statistical Office, Statistical Yearbook--AnnuaireStatistigue, New York, United Nations, 1974 and1982.
4. International Monetary Fund, International FinancialStatistic Yearbook, Washington D. C., PublicationsUnit, 1984,
5. Johnson, Richard A. and Gouri K. Bhattacharyya,Statistical Concepts and Methods, New York, Wiley,1977.
6. Lewis Beck, Michael, Applied Regression, AnIntroduction, Beverly Hills, Sage Publications,1982.
7. McDowall, David, et al, Interrupted Time SeriesAnalysis, Beverly Hills, Sage Publications, 1980.
8. Ostrom, Charles W., Time Series Analysis: RegressionTechniques, Beverly Hills, Sage Publications, 1978.
9. Spector, Paul E., Research Designs, Beverly Hills, SagePublications, 1981.
24
CHAPTER IV
ANALYSIS OF THE DATA
Introduction
This chapter presents an analysis of the data used to
test the hypotheses formulated in Chapter I. These
hypotheses were the following: (1) there will be a signi-
ficant positive relationship between the money supply and
the inflation rate; (2) there will be a significant nega-
tive relationship between real output (GNP) and the
inflation rate; (3) there will be a significant positive
relationship between nominal interest rates and the
inflation rate; (4) there will be a significant negative
relationship between unemployment and the inflation rate;
(5) there will be a significant relationship between the
exchange rate and the inflation rate; (6) there will be
a significant relationship between the balance of pay-
ments (BOP) and the inflation rate.
Time Series Regression Analysis
In order to analyze the independent variables (X1 . .
X7 ) impact on the dependent variable (Yt- CPI) a multiple
regression in the form of time series was run. The results
of these computations are shown in Table II which follows.
25
26
TABLE II
MULTIPLE REGRESSION RESULTS BETWEEN THEDEPENDENT VARIABLE (CIP)AND THEINDEPENDENT VARIABLES (MONEY,
GNP, . . . YR)
Independent RegressionVariable Coefficient T. Stat. Probability
Trend
Money
GNP
i
3.691
0.001
-0.476
1.079
-0.332
33.608
-0.001
6.114
u
ER
BOP
Yr
4.153
4.322
-4.145
0.888
-1.407
1.020
-1.863
1.203
0. 002*
0. 002*
0.002*
0.395
0.190
0.332
0.092
0.257
a (constant) -64.806
R (squared multiple R) =
F-Ratio = 372.928
P (probability) = 0.000
D-W = 2.250
* significant at the
0.446
.997
.05 level
The empirical evidence presented in Table II indicates the
viability of the research hypotheses.
0.665
27
Hypothesis I predicted a significant positive rela-
tionship between money supply and inflation. The obtained
positive T statistic = 4.322 (P = 0.002) was statistically
significant at the .05 level. Therefore, it supports the
hypothesis.
Hypothesis II predicted a significant negative rela-
tionship between GNP and inflation. The obtained negative
T statistic = -4.145 (P = 0.002) was statistically signi-
ficant at the .05 level. Thus, it supports the hypothesis.
Hypothesis III predicted a significant positive
relationship between interest rate and inflation. The
obtained positive T statistic = 0.888 (P = 0.395) was
not statistically significant at the .05 level. Therefore,
it does not support the hypothesis.
Hypothesis IV predicted a significant negative
relationship between unemployment and inflation. The
obtained negative T statistic = -1.407 (P = 0.190) was
not statistically significant at the .05 level. Thus,
it does not support the hypothesis.
Hypothesis V predicted a significant relationship
between the exchange rate and inflation. The obtained
T statistic = 1.020 (P = 0.332) was not statistically
significant at the .05 level. Therefore, it does not
support the hypothesis.
28
Hypothesis VI predicted a significant relationship
between the balance of payments and inflation. The obtained
T statistic = -1.863 P (0.092) was not statistically
significant at the .05 level. Thus, it does not support
the hypothesis.
The R (coefficient of multiple determination) recorded
a proportion of .997 variation in the dependent variable
explained or accounted for by the independent variables.
That is, the independent variables almost completely (99.7
percent) accounted for variation in the dependent variable.
The F value of 372.928 (P = 0.000) for the whole regression
model was statistically significant at the .05 level.
Therefore, the R and F values indicate a high explanatory
power of the regression model.
The Durbin-Watson statistic was 2.25. The tabled
value for du at n = 19 and k = 5 was 1.90. Since the
tabled value was less than the calculated value, there was
not significant positive autocorrelation. The tabled value
for dL at n = 19 and k = 5 was .66. Since the calculated
value was less than 4-dL, there was not significant
negative autocorrelation.
The residuals were also examined for heteroscedasticity.
The correlation between the absolute value of the residuals
29
and CPI is .095. At n = 19, the correlation coefficient
was not significant, meaning that the residuals did not
show significant heteroscedasticity.
CHAPTER BIBLIOGRAPHY
1. Bails, Dale G. and Larry Peppers, Business FluctuationsForecasting Techniues and Applications, NewJersey, Prentice Hall, 1982.
2. Cohen, Jacob and Patricia Cohen, Applied MultipleRegression/Correlation Analysis for the BehavioralSciences, New Jersey, Lawrence Erlbaum AssociatesPublishers, 1983.
3. Leedy, Paul D., Practical Research Planning andDesign, New York, Macmillan Publishing Company,1985.
4. Ostrom, Charles W., Time Series Analysis RegressionTechniques, Beverly Hills, Sage Publications,1978.
30
CHAPTER V
SUMMARY, FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
Summary
The purpose of this study was to examine the causal
relationship between the Venezuelan inflation and the
monetarist variables (Money, GNP, i) and the structuralist
variables (U, ER, BOP). Inflation was defined as: "A
continuously rising general price level, resulting in a
loss of the purchasing power of money" (1, p. 130).
Inflation is usually measured through a price index--
weighted average of a whole range of prices in the economy.
The data employed in this study comprised one time
series consisting of nineteen annual observations
(1964-1982). The independent variable (CPI) was measured
by using the index number reported in the International
Financial Statistic Yearbook, 1984 (IFS). The independent
variables, money supply and real output (GNP) were measured
by using the bolivar (national currency) volume as published
in the IFS. To measure the independent variables, interest
rate, unemployment and exchange rate, the rates as published
in the IFS were used. And, to measure the independent,
variable balance of payments (BOP), surplus or depreciation
figures as reported in the IFS were used.
31
32
The six hypotheses formulated for this study were as
follows.
1. There will be a significant positive relationship
between money supply and the inflation rate.
2. There will be a significant negative relationship
between real output (GNP) and the inflation rate.
3. There will be a significant positive relationship
between nominal interest rates and the inflation rate.
4. There will be a significant negative relationship
between unemployment and the inflation rate.
5. There will be a signficiant relationshp between the
exchange rate and the inflation rate.
6. There will be a significant relationship between
the balance of payments (BOP) and the inflation rate.
All of these hypotheses are shown in an operational form in
Appendix A, Table III.
The postulates that served as basis for the formulation
of these hypotheses were as follows:
1. Inflation is originated by a more rapid increase in
the money supply than in real output. The excess supply of
money ends up as an excess demand for current goods and
services, and prices must rise until the demand and supply
for money are once again in equilibrium (2). Therefore,
inflation results from a continued rise in the money supply.
33
2. Economies that experience lower rates of output
growth tend to have higher rates of inflation because they
cannot assimulate most of their monetary growth. Thus,
inflation is related to poor or slower real output growth.
3. An increase in the money supply would initially
reduce interest rates. This excess supply of money leads to
increasing aggregate demand and income, which would increase
the demand for loans and also liquidity preferences.
However, even in the short run, some price increases would
also occur. In the long run, inflationary expectations
catch up with actual inflation, and nominal interests rates
end up higher than they started (2). Therefore, interest
rates and the inflation rate are related to some extent.
4. Inflation is more likely to occur when unemployment
falls very low. However, a small rise in unemployment is
less likely to restrain inflation when the economy is
operating below capacity than when the economy is operating
nearer to full employment (3). Thus, changes in the
unemployment rate have some influence on the inflation rate.
5. There is a causal link between changes in domestic
prices and changes of the exchange rate. Exchange rate
depreciation causes internal prices to rise, and exchange
rate appreciation causes internal prices to fall.
Therefore, inflation and exchange rate movements bear a
functional relation to one another (4).
34
6. When a country runs a chronic balance of payments
surplus, its currency is undervalued.. Thus, its exchange
rate will appreciate, causing a reduction of the inflation
rate. On the other hand, if the country experiences a
chronic balance of payments deficit, its currency is over-
valued. Therefore, its exchange rate will depreciate and
will consequently drive the inflation rate up. Thus,
there is a causal influence between the balance of payments
and inflation.
Findings
A statistical analysis of the results obtained from
the application of the multiple regression technique to
the data used in this study revealed the following:
1. There was a significant positive relationship
between money supply and inflation.
2. There was a significant negative relationship
between real output (GNP) and inflation.
3. There was not a significant relationship between
nominal interest rates and inflation.
4. There was not a significant relationship between
unemployment and inflation.
5. There was not a significant relationship between
the exchange rate and inflation.
35
6. There was not a significant relationshp between
the balance of payments (BOP) and inflation.
Conclusions
According to the findings outlined above, a
significant positive relationship exists between inflation
and the monetarist variables, money and real output (GNP),
but not between inflation and interest rates. Also, no
relationship exists between inflation and the structuralist
variables, unemployment, exchange rate, and balance of
payments (BOP).
These findings support the first and second hypotheses
but do not support the others. Therefore, a conclusion
arrived to in this study is that the Venezuelan inflation
(1964-1982) is better explained by the monetarist theory.
Recommendations
It is considered that the following suggestions might
be of some contribution to similar future studies.
1. An investigation of inflation in Venezuela or any
other Latin American country could be conducted by using
the same causal variables, but selecting a longer time
period to better test for effects of economic conditions
and time.
2. A more refined methodology and extended analysis
could be developed in order to test for the importance of
36
other factors (e.g., relative price variability, wages,
imported inflation, price expectations) as explicit
causes of inflation in this country and/or other Latin
American nations.
37
CHAPTER BIBLIOGRAPHY
1. Greenwald, Douglas, The Encyclopedia of Economics, NewYork, McGraw Hill, 1982.
2. McCulloch, J. Huston, Money and Inflation: A MonetaristAproach, New York, Academic Press, 1975.
3. Perkins, J.O.N., Unemployment, Inflation and NewMacroeconomic Policy, New York, St. Martin's Press,1982.
4. Spaventa, Luigi, "Feedbacks Between Exchange RateMovements and Domestic Inflation: Vicious and Notso Virtuous Cycles Old and New," InternationalSocial Science Journal, 35 (3), 1983, pp. 517-535.
APPENDIX A
38
39
TABLE III
OPERATIONAL HYPOTHESES
Coefficient ofCorrelationHypotheses
More money supply more inflation;less money supply less inflation
More GNP less inflation; less GNPmore inflation
More interest rate rises, moreinflation; less interest rate rises,less inflation
More unemployment, less inflation;less unemployment, more inflation
More depreciation of the exchange rate,more inflation; less depreciation ofthe exchange rate less inflation
More deficit of the balance of payments,more inflation; less deficit of thebalance of payments,, less inflation
r positive
r negative
r positive
r negative
r positive
r positive
APPENDIX B
40
41
TABLE IV
DATA FOR THE STUDY
CpI Money* GNP** i U- ER BOP* YrYear (1) {2) (3) (4) (5) (6) (7) (8)
1964 40.6 4,399 126.90 4.5 -- 4.5011 86 0
1965 41.3 4,489 134*57 4.5 -- 4,4997 11 0
1966 42.0 4,620 137.92 4.5 -- 4.4988 - 67 0
1967 42.0 5,237 143.18 4.5 7.7 4.5001 96 0
1968 42.5 5,699 150.19 4.5 6.3 4.4999 50 0
1969 43.6 6,186 156.89 5.5 6.5 4.4996 12 0
1970 44.7 6,732 170.63 5.0 6.3 4.4983 46 0
1971 46.1 7,868 175.79 5.0 6.0 4.5007 418 0
1972 47.4 9,467 180.58 5.0 -- 4.4000 170 0
1973 49.4 11,368 191.87 5.0 - 4.3045 611 1
1974 53.5 16,006 203.50 5.0 -- 4.2850 4,468 1
1975 58.9 23,312 215.87 7.0 7.6 4.2850 2,715 1
1976 63.4 27.105 234.80 7.0 6.0 4.2899 2,343 1
1977 68.4 34.027 250.58 7.0 4.8 4.2925 799 1
1978 73.2 38,987 255.94 7.5 4.6 4.2925 -1,065 1
1979 82.3 42,460 259.36 11.0 5.4 4.2925 4,098 1
1980 100.0 50,209 254.20 13.0 6.0 4.2925 3,763 1
1981 116.0 54,954 253.43 14.0 6.2 4.2925 - 21 1
1982 127.3 58,015 255.14 13.0 7.1 4.2925 -8,163 1
*Millions of Bolivares **Billions of Bolivares
BIBLIOGRAPHY
Books
Bails, Dale G. and Larry Peppers, Business FluctuationsForecastin Techniques and Applications, New Jersey,Prentice Hall, 1982.
Baer, W. and J. Kerstenetzky (Eds.), Inflation and Growthin Latin America, New York, 1964.
Cohen, Jacob and Patricia Cohen, Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences,New Jersey, Lawrence Earlbaum Associates Publishers,1983.
Connor, L. R. and A. J. H. Morrell, Statistics in Theoryand Practice, London, Pitman, 1977.
Friedman, Irving S., Inflation a World Wide Disaster,Boston, Houghton Mifflin, 1973.
Friedman, M., Studies in the Quantity Theory of Money,Chicago, University of Chicago Press, 1956.
Jain, Chaman L., Contemporary Monetary Economics, Theoryand Policy, New York, Graceway Publishing Company,1981.
Johnson, Richard A. and Gouri K. Bhattacharyya, StatisticalConcepts and Methods, New York, Wiley, 1977.
Leedy, Paul D., Practical Research Planning and Design,New York, MacMillan Publishing Company, 1985.
Lewis Beck, Michael, Applied Regression, An Introduction,Beverly Hills, Sage Publications, 1982.
Maisel, Sherman J., Macroeconomics--Theories and Policies,New York, Norton, 1982.
Maynard, Geoffrey and W. Van Ryckeghem, A World of Infla-tion, New York, Barnes and Noble Books, 1975.
42
43
McCulloch, J. Huston, Money and Inflation: A MonetaristApproach, New York, Academic Press, 1975.
McDowall, David, et al., Interrupted Time Series Analysis,Beverly Hills, Sage Publications, 1980.
Morley, Samuel A., The Economics of Inflation, Hinsdale,Illinois, Dryden Press, 1971.
Ostrom, Charles W., Time Series Analysis: Regression
Techniques, Beverly Hills, Sage Publications, 1978.
Perkins, J. 0. N., Unemployment, Inflation and New Macro-
economic Policy, New York, St. Martin's Press, 1982.
Prebisch, Raul, The Economic Development of Latin America
and Its Principal Problems, New York, 1950.
Spector, Paul E., Research Designs, Beverly Hills, SagePublications, 1981.
Vane, Howard and John L. Thompson, Monetarist, Theory,Evidence and Policy, New York, Wiley, 1979.
Watcher, Susan M., Latin American Inflation The Monetarist-
Structuralist Debate, Massachusetts, Lexington Books,1976.
Articles
Campos, R. 0., "Two Views on Inflation in Latin America,"in A. Hirschman (Ed.), Latin American Issues, Twentieth
Century Fund, 1961, pp. 69-79.
Hanson, James A., "The Short Run Relationship between
Growth and Inflation in Latin America: A Quasi
Rational or Consistent Expectations Approach,"
American Economic Review, 70 (5), 1980, pp. 972-
989.
Harberger, A.,, "The Dynamics of Inflation in Chile," in
Measurements in Economics, edited by C. Christ,Stanford University Press, 1963.
Maynard, G. , "Inflation and Growth: Some Lessons to beDrawn from Latin American Experiences," Oxford EconomicPapers, 13 (2), 1961, pp. 184-201.
44
Spaventa, Luigi, "Feedbacks between Exchange Rate Move-
ments and Domestic Inflation: Vicious and Not So
Vicious Cycles Old and New," International Social
Science Journal, 35 (3), 1983, pp. 517-535.
Sunkel, 0. , "La Inflation Chilena: Un Enfoque Hetero-doxo," El Trimestre Economico, 25 (4), 1958
pp. 570-599.
Reports
Department of International Economic and Social Affairs,
Statistical Office, Statistical Yearbook--AnnuaireStatistique, New York, United Nations, 1974 and
1982.
International Monetary Fund, International FinancialStatistic Yearbook, Washington D.C., PublicationsUnit, 1984.
Encyclopedia Articles
Greenwald, Douglas, "Balance of Payments," "Exchange Rate,"
"Interest Rate," and "Unemployment," The Encyclopedia
of Economics, New York, McGraw Hill, 1982.
"Money Supply," The Encyclopedia of Economics, Connecticut,D. P. G. Reference Publishing, Inc., 1981.
Pearce, David W., "Balance of Payments Trade," Dictionary
of Modern Economics, Cambridge, Massachusetts, MIT
Press, 1983.
Unpublished Materials
Rodriguez, M. A.,"Inflation, the Balance of Payments,
and Real Output in Venezuela," unpublished Doctoral
Dissertation, Yale University, 1983.