Analysis of The Long-Term Links Between the Money Supply and The Consumer Price Index of The Republic of Azerbaijan

Abstract

Purpose of the study. Monetary policy is one of the most effective tools of the state under the control of the central bank. It allows you to influence macroeconomic components, such as the amount of money supply, activity in the credit market and the exchange rate of the national currency. Such actions lead to an increase in the money supply and the speed of its turnover, ensuring the availability of loans. Economic growth is being stimulated, but there are also adverse consequences - inflation is accelerating. The central bank uses monetary policy more frequently to bring about the desired level of change in real economic activity. These changes significantly affect the stock market. Economic theory uses the relationship between the money supply and the consumer price index. An analysis of the impact of the money supply on the consumer price index is necessary to select the most reliable type of monetary policy in the economy, to ensure macroeconomic stability or to stimulate economic growth. The money supply not only denotes and shows the level of money in various types and forms, but is also an important indicator on which price increases, inflation, credit policy, etc. depend. The dynamics of the money supply determines the dynamics of prices. The accumulation of excess money supply in the country’s economy leads to the depreciation of the national currency. The purpose of the study is to analyze the long-term relationship between the money supply and the consumer price index of the Republic of Azerbaijan.Materials and methods. In the article to analyze the long-term links between monetary aggregates M1, M2 and the consumer price index of the Republic of Azerbaijan based on quarterly data for 2005-2018, a long-term equilibrium state model and a short-term error correction model were designed. With the help of cointegration analysis and a vector model, the long-term and short-term aspects of the links between the growth of the money supply and the increase in the price level are investigated. For the regression analysis of these models, the EViews 8 application package was used.Results. Using the various methods showed that the dynamics of M1 and M2 monetary aggregates determine the growth of the consumer price index in Azerbaijan both in the long-term and in the short-term periods.Conclusion. The analysis allows us correctly approaching the problem of modelling the inflation level and to obtain a statistically acceptable and stable model with good predictive characteristics. The fact that there is a connection in the opposite direction has been confirmed. The use of various complementary methods showed that the dynamics of monetary aggregates M1 and M2 determines the growth of the consumer price index in Azerbaijan both in the long and short term.

Keywords

• monetary aggregates
• regression analysis
• time series
• error correction model
• cointegratio
• the dickey-fuller test
• johansen cointegration test