The nexus between public expenditure and inflation in the Mediterranean countries

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, we find a long-run relationship between the growth of public expenditure and inflation only for Portugal. Furthermore, Granger causality tests results show a short-run evidence of a directional flow from expenditure to inflation for Cyprus, Malta and Spain; of a bidirectional flow for Italy; and from inflation to public expenditure for France. Some notes on the policy implications of our empirical results conclude the paper