Abstract:

Using monthly data for the period 1995 January – 2010 November this paper addresses detection of the relationship between price level and money supply in Azerbaijan for the post high inflation period. Findings of Granger causality tests indicate that there is short-run bidirectional causal relationship between price level and money supply indicator. Error correction model denotes that there is a long-run causal relationship from money supply to prices. These findings confirm the monetarist opinion that inflation is a monetary event. Furthermore, causal relationship from inflation to money stock growth supports structuralist opinion, that monetary expansion is a consequence of structural inflation, which is claimed to be valid mostly for developing countries. Additionally, bidirectional causal relationship between inflation and money supply growth indicates that monetary authority implements monetary policy in an accommodating pattern with inflation and inflation in Azerbaijan has cost push or structural characteristics

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