A granger - causality analysis on the public deficit - money supply relationship: some evidence for Greece

Abstract

An issue which has attracted the attention of many monetarist economists is the relationship
between public debt and the money stock. The question addressed in this paper is what theoretical
and empirical basis is there for the beliefs that public sector deficits will result in an
expansion of money supply. In our analysis we used the Lutkepohl and Reimers version of the
Johansen cointegration approach in order to investigate the relationship between public deficit
and money supply in the Greek economy. Our results give support to a strong relationship
between the public deficit and the broad money supply (M3), suggesting that the Greek financial
system was operating with a high degree of monetization for the period under examination.