Bivariate and multivariate tests of the inflation‐productivity Granger‐temporal causal relationship: evidence from Greece

Abstract

Examines the causality issue, in a Granger‐temporal causal sense, between price level and productivity in a bivariate and multivariate context in Greece over the period 1962‐1997. The empirical analysis employs various time‐series techniques such as unit‐root testing, bivariate and multivariate cointegration and procedures in vector error‐correction modeling (VECM). The empirical results suggest that a bivariate relationship between inflation and productivity is spurious, as the unit root pre‐tests that account for oil shock episodes show that inflation and productivity are integrated of a different order. When we control for fluctuations of overall economic activity and monetary policy on the bivariate relationship between price level and productivity, the evidence suggests that Granger‐causation must exist in at least one direction. VECM estimation showed that productivity growth and inflation are an econometrically endogenous variable and this suggests that bi‐directional causality from inflation to productivity growth and vice versa exists.

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