W19 L

INFLATION IN VENEZUELA: THE CASE

FOR NO SINGLE CAUSE

THESIS

Presented to the Graduate Council of the

North Texas State. University in Partial

Fulfillment of the Requirements

For the Degree of

MASTER OF SCIENCE

By

Florangel Rodriguez, B.S.

Denton, Texas

December, 1987

Rodriguez, Florangel, Inflation in Venezuela: The

Case for No Single Cause. Master of Science (Interdisci-

plinary Studies), December, 1987, 44 pp., 4 tables,

bibliography, 18 titles.

The study was designed to examine the causal relation-

ship between the Venezuelan inflation and the monetarist

variables--money supply--and the structuralist variables--

exchange rate and balance of payments. The data (1964-1982)

was gathered from the International Financial Statistic

Yearbook, 1983 and the Statistical Yearbook, 1974, 1982.

Chapter I is an introduction to the research problem.

Chapter II does a review of the related literature. Chapter

III deals with the methods and procedures for treating the

data. Chapter IV presents an statistical analysis of the

data. And, Chapter V contains a summary of the study and

its findings, conclusions and recommendations.

The study only found a significant relationship between

inflation and the monetarist variables money supply and GNP,

though supporting the monetarist theory.

A similar investigation is suggested, but selecting a

longer time period, other.variables, and more refined

methodologies and analysis.

TABLE OF CONTENTS

PageLIST OF TABLES. .i.......... .. . . . . .. a

Chapter

I. INTRODUCTION.. ........... .

Background and SignificancePurpose of the StudyStatement of the ProbleymHypothesesDefinition of Terms

II. REVIEW OF THE RELATED LITERATURE ........ 12

III. METHODS AND PROCEDURES......... ......... 20

The DataProcedures for Treating Data

IV. ANALYSIS OF THE DATA. ..... . .. . .. .25

IntroductionTime Series Regression Analysis

V. SUMMARY, FINDINGS, CONCLUSIONS, ANDRECOMMENDATIONS..... . .... ... 31

SummaryFindingsConclusionsRecommendations

APPENDICES*..................... ....... ........ 38

BIBLIOGRAPHY. ......... ..................... 42

iii

LIST OF TABLES

Table Page

I. Description of the Variables........... 21

II. Multiple Regression Results Betweenthe Dependent Variable (CIP) andthe Independent Variables (Money,GNP, . . . Yr) ..*.......................26

III. Operational Hypotheses.......... .... W..... 39

IV. Data for the Study.............. . ........... 41

iv

CHAPTER I

INTRODUCTION

Background and Significance

Inflation is one of the great evils of our time. It

is a major concept related to many other terms and concepts

in macroeconomics (e.g., price level, business cycles,

business cycle phases). A simple and clear definition of

inflation (the one utilized in this research) is the

following: "A continuously rising general price level,

resulting in a loss of the purchasing power of money"

(4, p. 130). Inflation is usually measured through a

price index--weighted average of a range of prices in

the economy.

Continuously rising prices are a world-wide problem

which has existed for more than a generation. Some

economies and societies are more sensitive to rising

prices and costs than others. However, nations seek,

in their own ways, to cope and protect themselves

against the relative damage historically high inflation

rates inflict (13, p. 8). Inflation is inequitable.

It has the effect of favoring higher income groups,

thus making the distribution of income and wealth

less equal. Some groups are in a better position

1

2

because of special skills, market power, or political power

to protect their real income. The most disadvantaged group

is the one whose income is fixed in money terms. Inflation

can also be regarded as a kind of tax which reduces

purchasing power, as all taxes do. It is a very

discriminatory tax, falling unequally on different groups of

taxpayers in the economy. The government gains by being

able to increase its noninterest-bearing debt and because

many tax rates are based on nominal income. Inflation

causes the economic system to operate inefficiently. It

distorts pricing, planning, resource allocation and

investment decisions. Production and investment are lowered

because change in the value of money causes poor decisions

to be made. A diversion of resources takes place, including

entrepreneurial talents from productive employment to

nonproductive speculation. Improperly calculated interest

and discount rates bias investment decisions. The demand

for physical assets increases and the demand for financial

assets decreases. There is a flight from all financial

assets into physical goods. Long-term commitments are

avoided and investment projects become unattractive.

Inflation also negatively affects a nation's international

trade balance. Foreign importers shift their preferences

elsewhere when the price of a country's products are rising

relative to those of other countries. This causes a decline

3

in the nation's exports and, at the same time, an increase

in the nation's imports as the products of other countries

look increasingly attractive to national buyers. Should

this tendency persist very long, the nation would be forced

to devaluate its currency in international trade which can

bring serious repercussions. Inflation and its corrosive

effects on society have not been the monopoly of a few

countries but a world wide phenomenon. Indeed, it is found

in all types of societies, at any stage of economic

development, under different kinds of government and

political ideologies. Inflationary factors in Latin America

assume particular importance since this region has been

more plagued by inflation than elsewhere. Most Latin

American regions, except for a small group of countries,

have suffered from very high rates of inflation since the

beginning of the century. In the case of Venezuela,

inflation remained unknown and hidden until its strong

appearance in 1974. From then on, the country's economy

has exhibited a deteriorating trend that has brought about

rising prices, stagnation, balance of payments problems,

increasing foreign debt and develuation of its currency.

In this investigation of Venezuelan inflation, two

contending schools of thought are identified in order to

survey and test their theories about the nature of the

determinants of inflation in this country. One is the

4

"Latin American monetarist," which states that inflation is

the result of continued expansion of aggregate demand after

real income approaches the capacity or supply constraints of

the economy. This inflation is generated by unjustified

expansion both in government deficits (financed for the

most part by increases in the money supply) and in central

bank loans to the public and commercial banks. Due to

the weakness of government bond markets, little expansion

in aggregate demand occurs without concomitant growth in

money supply. Thus, increases in the money supply accompany

expansionary fiscal policy as well as expansionary monetary

policy. The other school of thought is the "Latin American

structuralists." They agree that monetary expansion is a

propagating factor in inflation. They feel that more

fundamental, structural causes are at the root of the

inflationary process. The basic source of rising prices is,

in general terms, the pressure of economic growth on an

underdeveloped social and economic structure, in particular,

the agriculture, foreign trade, and government sectors (14).

Purpose of the Study

The purpose of this study is to test and analyze the

monetary and structural factors responsible for the

Venezuelan inflation for the years 1964 through 1982. The

economic literature on inflation in several other Latin

5

American countries (Brazil, Argentina, Mexico, Chile) is

vast. However, that is not the case for Venezuela which

makes this study of considerable interest and usefulness

in understanding the country's recent inflationary

phenomenon. In order to offer the best possible explanation,

this study views Venezuelan inflation as an interaction of

several different monetarist and structural factors.

Statement of the Problemrv

This study was designed to examine the causal rela-

tionship between the Venezuelan inflation and the monetarist

variable--money supply--and between inflation and the

structuralist variable--the exchange rate. The critical

and unavoidable question following the problem is:

Would an experimental design (empirical findings) support

the following assumptions?

1. Inflation is originated by a more rapid increase

in the money supply than in real output. The excess

supply of money ends up as an excess demand for current

goods and services, and prices must rise until the demand

and supply for money are once again in equilibrium (9).

Therefore, inflation results from a continued rise in

the money supply.

2. Economies that experience lower rates of output

growth tend to have higher rates of inflation because they

6

cannot assimilate most of their monetary growth. Thus,

inflation is related to poor or slower real output growth.

3. An increase in the money supply would initially

reduce interest rates. This excess supply of money leads to

increasing aggregate demand and income which would increase

the demand for loans and also liquidity preference.

However, even in the short run, some price increases would

also occur. In the long run, inflationary expectations

catch up with actual inflation, and nominal interest rates

end up higher than they started (9). Therefore, interest

rates and the inflation rate are related to some extent.

4. Inflation is more likely to occur when unemployment

falls very low. However, a small rise in unemployment is

less likely to restrain inflation when the economy is

operating below capacity than when the economy is operating

nearer to full employment (12). Thus, changes in the

unemployment rate have some influence on the inflation rate.

5. There is a causal link between changes in domestic

prices and changes of the exchange rate. Exchange rate

depreciation causes internal prices to rise, and exchange

rate appreciation causes internal prices to fall.

Therefore, inflation and exchange rate movements bear a

functional relation to one another (14).

6. When a country runs a chronic balance of payments

surplus, its currency is undervalued. Thus, its exchange

7

rate will appreciate causing a reduction of the inflation

rate. On the other hand, if the country experiences a

chronic balance of payments deficit, its currency is

overvalued. Therefore, its exchange rate will depreciate

and will consequently drive the inflation rate up. Thus,

there is a causal influence between the balance of payments

and inflation.

Hypotheses

From the assumptions above, the following hypotheses

were formulated:

Hypotheses I. There will be a significant positive

relationship between the money supply and the inflation

rate.

Hypothesis II. There will be a significant negative

relationship between real output (GNP) and the inflation

rate.

Hypotheses-III. There will be a significant positive

relationship between nominal interest rates and the

inflation rate.

Hypothesis IV. There will be a significant negative

relationship between unemployment and the inflation rate.

Hypothesis V. There will be a significant relationship

between the exchange rate and the inflation rate.

8

Hypothesis-VI. There will be a significant

relationship between the balance of payments (BOP) and the

inflation rate.

These hypotheses are shown in an operational form in

Appendix A, Table III.

Definition of Terms

Money Supply. A nation's money supply consists of

immediately available purchasing power in the hands of the

general public. It is some combination of currency (coins

and paper money), notes issued by governments or banks and

bank deposits (2, 4).

Real Output-or Real GNP. The total money value of

goods and services produced by an economy in a given period

of time, measured in constant prices, that is, current price

values corrected for inflation (7).

Interest-Rate. The price paid for the use of money

over time. Real interest rate is nominal interest rate

adjusted to reflect this interest yield minus the change in

prices (4).

Unemployment. The percentage of people in the labor

force who are not working. Those not seeking employment

(students, housewives, others) are not in the labor force

and thus not considered unemployed (4).

9

Exchange .Rate. The number of units of one country's

currency that exchanges for a unit of another country, the

domestic price of a unit of foreign currency (4, 7).

Depreciation of the Exchange -Rate. Any reduction

in the value of one currency relative to the value of

another after the relative value of the two currencies

have been fixed at an officially agreed upon level (4).

Appreciation of the Exchange-Rate. Any increase

in the value of one currency relative to the value of

another after the relative values of the two currencies

have been fixed at an officially agreed upon level (4).

Balance of Payments. For a country, balance of

payments is a summary of all economic transactions between

it and the rest of the world for a given period time.

Payments cover trade, services, or movements of financial

assets (4, 7).

Balance -of-Payments Trade. The difference between

merchandise exports and imports in a nation's balance

of payments. If exports exceed imports the balance of

payments is favorable, or in surplus, if imports exceed

exports the balance of payments is unfavorable, or in

deficit (11).

CHAPTER BIBLIOGRAPHY

1. Campos, R. 0., "Two Views on Inflation in LatinAmerica," in A. Hirschman (Ed.), Latin AmericanIssues, Twentieth Century Fund, 1961, pp. 69-79.

2. D.P.G., Reference Publishing, Inc., The Encyclopedia ofEconomics, Connecticut, D.P.G. ReferencePublishing, Inc., 1981.

3. Friedman, Irving S., Inflation a World Wide Disaster,Boston, Houghton Mifflin, 1973.

4. Greenwald, Douglas, The Encyclopedia of Economics, NewYork, McGraw Hill, 1982.

5. Hanson, James A., "The Short Run Relationship betweenGrowth and Inflation in Latin America: A QuasiRational or Consistent Expectations Approach,"American Economic Review, 70(5), 1980, pp. 972-989.

6. Jain, Chaman L., Contemporary Monetary Economics Theoryand Policy, New York, Graceway Publishing Company,1981.

7. Maisel, Sherman J., Macroeconomics---Theories andPolicies, New York, Norton, 1982.

8. Maynard, Geoffrey and W. Van Ryckeghem, A World ofInflation, New York, Barnes and Noble Books, 1975.

9. McCulloch, J. Huston, Money and Inflation: A MonetaristApproach, New York, Academic Press, 1975.

10. Morley, Samuel A., The Economics of Inflation, Hinsdale,Illinois, Dryden Press, 1971.

11. Pearce, David W., Dictionary of Modern Economics,Cambridge, Massachusetts, MIT Press, 1983.

12. Perkins, J.O.N., Unemployment, Inflation and NewMacroeconomic Policy, New York, St. Martin's Press,1 982.

10

11

13. Rodriguez, M. A., "Inflation, the Balance of Payments,and Real Output in Venezuela," unpublished DoctoralDissertation, Yale University, 1983.

14. Spaventa, Luigi, "Feedbacks Between Exchange RateMovements and Domestic Inflation: Vicious and Notso Virtuous Cycles Old and New," InternationalSocial Science Journal, 35 (3); 1983, pp. 517-535.

15. Vane, Howard and John L. Thompson, Monetarist, Theory,Evidence and Policy, New York, Wiley, 1979.

16. Wachter, Susan M., Latin American Inflation TheMonetarist-Structuralist Debate, Massachusetts,Lexington Books, 1976.

CHAPTER II

REVIEW OF THE RELATED LITERATURE

The predominant body of economic theory until the 1950s

was the classical one. It had been developed in the West,

addressing issues which were largely applicable and relevant

to those countries' conditions. Its assumptions of perfect

mobility of factors of production within each country, and

the clearing of markets through prices alone, may have some

reality with respect to Western nations, but certain Latin

American economists thought that this did not hold true for

their region.

So began the origins of the structuralist school in the

1950s, with Raul Prebisch's writings (1950) on the tendency

for Latin American countries' terms of trade to constantly

deteriorate. He said that the demand for industrial goods

(making up most of the West's exports) was such that

successful development of new products was comparatively

easy, once the market for a former product had been

saturated. In contrast, when a certain primary product

loses its market, it is practically doomed to extinction,

creating a serious terms of trade deterioration for the

(Latin American) exporting country.

12

13

Prebisch made a number of other important observations

and recommendations, which are not relevant to this

discussion. However, one could name him as the person who

provided the initial theoretical justifications of

structuralism, and introduced the idea of looking at Latin

American economies in a different way (6). The

structuralist school questions the concepts of cost-push and

demand-pull as the basic causes of inflation. It is said

that Latin America is replete with cases of factor

immobility, market imperfections, disequilibrium between

demand and supply in some sectors, and underutilization of

resources in the manufacturing sector. It is quite possible

to encounter bottlenecks in one area, and unemployment of

factors of production in another.

Sunkel, in his 1958 paper on Chilean inflation

identified three key bottlenecks. The inelastic supply of

foodstuffs, the foreign exchange shortage, and the domestic

budget constraint. In his opinion, the supply of

agricultural products is inelastic for several reasons. The

land tenure system is primarily divided into tiny peasant

plots (minifundia) and huge estates (latifundia). Peasants

are simply too poorly educated and poorly trained to be able

to take advantage of increased demand for their goods, while

the owners of the latifundias are not entrepreneurs in the

sense of a profit making propensity. The land has been in

14

the family, possibly for generations, and is held mainly for

prestige and demonstration of status. Hence, they too are

unresponsive to increased demand for agricultural goods.

When urbanization began in earnest some 30 years ago and the

market for foodstuffs greatly expanded, high inflation rates

became the norm (8).

Not all structuralists agree with this interpretation

though. Maynard (1961) believed that many Latin American

governments actively promoted industry at the expense of

agriculture by providing cheap credit and protection to the

former and turning the internal terms of trade against

agriculture (5).

The foreign exchange shortage is caused by the

composition of these countries' exports and imports. Latin

America relies mainly on the export of a few primary

commodities and imports a great amount of industrial goods.

The demand for primary products is elastic, due to the

relative availability of substitutes, whereas demand for

industrial goods is inelastic. This is the same as

Prebisch's argument that import prices have a strong

tendency to move up, while export prices tend to move down.

Clearly, this creates a persistent foreign exchange problem,

accompanied by inflationary import prices.

A third reason for structural inflation proposed by

Baer (1964) was the domestic budget. As the development

15

effort came into full swing, increased infrastructure was

needed, such as roads, social services, and new governmental

institutions. The government was the only establishment

capable of providing them. However, tax collection was

inefficient and governments had to resort to deficit

financing. As years passed, political considerations were

strengthened, these budget deficits continued, and inflation

followed this new institutional reality (1).

Finally, the structuralists argue that the price of

nonfood and nontradable goods are sticky, meaning they do

not decrease if their demand decreases. This occurs because

of factor immobilities and other institutional constraints.

Harberger (1963) and Friedman (1956) are probably the

most authoritative monetarist thinkers on the causes of

inflation in Latin America (3,4). Friedman (1956) applied

his theory of inflation worldwide, namely that a monetary

expansion due to government deficit spending and

expansionist credit policies raises the overall level of

economic activity, and that itself raises the price level.

The basic monetarist model is built on a stable demand

function for real money balances. They differ fundamentally

with the structuralists in that they assume money supply is

exogenuously determined by the authorities. Their response

to the inelasticity of food supplies is that governments

reacted to initial price increases by instituting controls

16

in order to protect the urban population from further price

increases and preempt any requests for wage increases. Such

interference in the operation of market forces acted as a

damper on incentives to produce more food, and the land

tenure system cannot be blamed for inflation.

As for the foreign exchange shortage, the monetarists

have a simple reply: the exchange rate in most Latin

American countries has been overvalued. This means imports

are artifically cheap, creating excess demand for foreign

goods, and exports are at a disadvantage, thereby reducing

demand for the domestic currency.

Monetarists thus acknowledged the existence of

bottlenecks, but attributed them to government induced price

controls and unjustified monetary expansion. De Olivera

Campos (1961) stated that stable and sustained growth can

only take place in an environment of monetary stability (2).

Harberger (1963) developed a model based on the liquidity

preference function where the price level is a function of

real income and a measure of previous inflation rates. He

tested his model on the Chilean economy, and concluded that

monetary expansion was the prime cause of inflation. In

another lecture delivered in 1978, he provided data to show

the same held true for Brazil, Argentina, and Uruguay (4).

Wachter (1976) provided a lucid critique of the

structuralist thought. She stated that in Chile, at least,

17

the prices of nonfarm goods have not been merely sticky but

have risen in the face of excess supply. The structuralists

have nothing to say about this. Second, she said the

increase in agricultural prices coupled with rigid nonfarm

prices can only account for a once-and-for-all overall price

rise, and not a constant one, as has been the case. Third,

she postulated that farm prices have risen in Chile in the

1940-1970 period, but not at an increasing rate, whereas

Chilean inflation rates themselves have been increasing.

Fourth, the structuralist school did not provide any sound

theoretical reasoning about why nonfarm prices were rigid.

She used the oligopolistic model of profit maximization to

substantiate her conclusions (9).

In recent years, structuralists have tried to

reformulate their original positions by introducing the

concept of imported inflation. They say three major factors

have given rise to imported inflation in the 1980s: a rapid

rise in the price of imported commodities; unprecedented

high interest rates in the first half of this decade; and

the forced reduction in imports and consequent supply

restrictions.

The problem with the structuralist model is that it

does not easily lend itself to any rigorous empirical

testing. Wachter and others have used the monetarist models

along with proxies for structural constraints to test the

18

validity of the structuralist school's ideas. Their results

have generally shown that institutional bottlenecks do have

an influence on inflation, so it seems the debate is still

open.

Miguel Antonio Rodriquez studied inflation in Venezuela

in 1983. He found no systematic relationship between the

increase in money supply and the inflation rate. However,

his structuralist model of inflation revealed that such

constraints had a bearing on Venezuelan inflation. His

thesis also showed that imported inflation and inflationary

expectations contributed significantly to price level

increases (7).

CHAPTER BIBLIOGRAPHY

1. Baer, W. and J. Kerstenetzky (Eds.), Inflation andGrowth in Latin America, New York, 1964.

2. Campos, R. 0., "Two Views on Inflation in LatinAmerica," in A. Hirschman (Ed.), Latin AmericanIssues, Twentieth Century Fund, 1961, pp. 69-70.

3. Friedman, M., Studies in the Quantity Theory of Money,Chicago, University of Chicago Press, 1956.

4. Harberger, A., "The Dynamics of Inflation in Chile," inMeasurements in Economics, edited by C. Christ,Stanford University Press, 1963, pp. 219-250.

5. Maynard, G., "Inflation and Growth: Some Lessons to beDrawn from Latin American Experiences," OxfordEconomic Papers, 13 (2), 1961, pp. 184-201.

6. Prebisch, Raul, The Economic Development of LatinAmerican and Its Principal Problems, New York,1950.

7. Rodriquez, M. A., "Inflation, the Balance of Payments,and Real Output in Venezuela," unpublished DoctoralDissertation, Yale University, 1983.

8. Sunkel, 0., "La Inflacion Chilena: Un EnfoqueHeterodoxo," El Trimestre Economico, 25 (4), 1958,pp. 570-599.

9. Wachter, S., Latin American Inflation theMonetarist-Structuralist Debate, Boston, LexingtonBooks, 1976.

19

CHAPTER III

METHODS AND PROCEDURES

In order to accomplish the purpose of this study,

certain approaches and methodologies were adopted. The

type of data and the appropriate statistical techniques

used to process that data and to test the hypotheses were

determined by the basic information available.

The Data

The data used in this study comprised one time series

gathered from the International Financial Statistic Year-

book, 1983 and the Statistical Yearbook, 1974, 1982. Each

data set consists of nineteen annual observations from

1964-1982 (see Table IV, Appendix B). The variables

included in this study are presented in Table I.

Procedures for Treating Data

The procedures followed in treating the data were:

1. The specific statistical technique employed

for both hypothesis testing and as empirical basis for

analyzing and interpreting the results was time series

regression analysis.

2. The statistical software that processed the data

in this study used a hierarchical multiple regression

20

21

TABLE I

DESCRIPTION OF THE VARIABLES

Measurement andVariable Name Data Source

DependentY

Independentxl

x2

x3

x4

x5

x6

x 7

Consumer Price Index(CPI). A measurementof the inflation rate

Money Supply (Money)

Real Output (GNP)

Interest Rate (i)

Unemployment (U)

Exchange Rate (ER)

Balance of Payments(BOP)

Year 1964-1982 (Yr)

Index numberreported in IMSs*

Bolivar (Nationalcurrency) volumeas published inIMSs*

Bolivar (Nationalcurrency) volumeas published inIMSs*

Rate as publishedin IMSs*

Rate as publishedin the statisticalyearbook**

Rate as publishedin IMSs*

Surplus or deficitas reported inIMSs*

Dummy variablecoded by theresearcher

**From Statistical Yearbook, 1974, 1982.

*From International Financial Statistics Yearbook,

1984.

22

technique. The full hierarchical procedure consisted of a

final regression equation which resulted from a sequenced

addition of causal variables to a simple regression equation

(one causal variable equation). The choice of a particular

sequence (hierarchy) was made by the researcher.

3. The time series regression model included a dummy

variable (X7) which represented the pre- (1964-1972) and

post-intervention (1973-1982) segments of the time series.

This dummy variable was coded by using the "I" - "0" dummying

technique (6, p. 66). Where X7 (Year) scored 1 if year was

after 1972, and 0 if otherwise.

4. The linear function developed from the procedures

outlined above was:

Yt = a + b1x1 + b22 + b3x3'+ h..7x7 + e

where:

Y= the dependent variable (CPI)

a = the intercept or constant term

b- bn = the regression coefficients

x- xn = the independent variables, and

et = the residuals or error term.

In time series of this sort, it is clear that auto-

correlation among the data may pose some problem of esti-

mation precision. Autocorrelation is defined as a

dependence (lack of randomness) among successive observations

23

about a single variable at different points in time

(5, p. 411). In order to avoid the impact of autocor-

relation on the quality of the inferences drawn from

empirical analysis, the Durbin-Watson test was employed

to test for its presence (8, p. 31).

CHAPTER BIBLIOGRAPHY

1. Cohen, Jacob and Patricia Cohen, Applied MultipleRegression/Correlation Analysis for the BehavioralSciences, New Jersey, Lawrence Earlbaum AssociatesPublishers, 1983.

2. Connor, L. R. and A. J. H. Morrell, Statistics in Theoryand Practice, London, Pitman, 1977.

3. Department of International Economic and Social Affairs,Statistical Office, Statistical Yearbook--AnnuaireStatistigue, New York, United Nations, 1974 and1982.

4. International Monetary Fund, International FinancialStatistic Yearbook, Washington D. C., PublicationsUnit, 1984,

5. Johnson, Richard A. and Gouri K. Bhattacharyya,Statistical Concepts and Methods, New York, Wiley,1977.

6. Lewis Beck, Michael, Applied Regression, AnIntroduction, Beverly Hills, Sage Publications,1982.

7. McDowall, David, et al, Interrupted Time SeriesAnalysis, Beverly Hills, Sage Publications, 1980.

8. Ostrom, Charles W., Time Series Analysis: RegressionTechniques, Beverly Hills, Sage Publications, 1978.

9. Spector, Paul E., Research Designs, Beverly Hills, SagePublications, 1981.

24

CHAPTER IV

ANALYSIS OF THE DATA

Introduction

This chapter presents an analysis of the data used to

test the hypotheses formulated in Chapter I. These

hypotheses were the following: (1) there will be a signi-

ficant positive relationship between the money supply and

the inflation rate; (2) there will be a significant nega-

tive relationship between real output (GNP) and the

inflation rate; (3) there will be a significant positive

relationship between nominal interest rates and the

inflation rate; (4) there will be a significant negative

relationship between unemployment and the inflation rate;

(5) there will be a significant relationship between the

exchange rate and the inflation rate; (6) there will be

a significant relationship between the balance of pay-

ments (BOP) and the inflation rate.

Time Series Regression Analysis

In order to analyze the independent variables (X1 . .

X7 ) impact on the dependent variable (Yt- CPI) a multiple

regression in the form of time series was run. The results

of these computations are shown in Table II which follows.

25

26

TABLE II

MULTIPLE REGRESSION RESULTS BETWEEN THEDEPENDENT VARIABLE (CIP)AND THEINDEPENDENT VARIABLES (MONEY,

GNP, . . . YR)

Independent RegressionVariable Coefficient T. Stat. Probability

Trend

Money

GNP

i

3.691

0.001

-0.476

1.079

-0.332

33.608

-0.001

6.114

u

ER

BOP

Yr

4.153

4.322

-4.145

0.888

-1.407

1.020

-1.863

1.203

0. 002*

0. 002*

0.002*

0.395

0.190

0.332

0.092

0.257

a (constant) -64.806

R (squared multiple R) =

F-Ratio = 372.928

P (probability) = 0.000

D-W = 2.250

* significant at the

0.446

.997

.05 level

The empirical evidence presented in Table II indicates the

viability of the research hypotheses.

0.665

27

Hypothesis I predicted a significant positive rela-

tionship between money supply and inflation. The obtained

positive T statistic = 4.322 (P = 0.002) was statistically

significant at the .05 level. Therefore, it supports the

hypothesis.

Hypothesis II predicted a significant negative rela-

tionship between GNP and inflation. The obtained negative

T statistic = -4.145 (P = 0.002) was statistically signi-

ficant at the .05 level. Thus, it supports the hypothesis.

Hypothesis III predicted a significant positive

relationship between interest rate and inflation. The

obtained positive T statistic = 0.888 (P = 0.395) was

not statistically significant at the .05 level. Therefore,

it does not support the hypothesis.

Hypothesis IV predicted a significant negative

relationship between unemployment and inflation. The

obtained negative T statistic = -1.407 (P = 0.190) was

not statistically significant at the .05 level. Thus,

it does not support the hypothesis.

Hypothesis V predicted a significant relationship

between the exchange rate and inflation. The obtained

T statistic = 1.020 (P = 0.332) was not statistically

significant at the .05 level. Therefore, it does not

support the hypothesis.

28

Hypothesis VI predicted a significant relationship

between the balance of payments and inflation. The obtained

T statistic = -1.863 P (0.092) was not statistically

significant at the .05 level. Thus, it does not support

the hypothesis.

The R (coefficient of multiple determination) recorded

a proportion of .997 variation in the dependent variable

explained or accounted for by the independent variables.

That is, the independent variables almost completely (99.7

percent) accounted for variation in the dependent variable.

The F value of 372.928 (P = 0.000) for the whole regression

model was statistically significant at the .05 level.

Therefore, the R and F values indicate a high explanatory

power of the regression model.

The Durbin-Watson statistic was 2.25. The tabled

value for du at n = 19 and k = 5 was 1.90. Since the

tabled value was less than the calculated value, there was

not significant positive autocorrelation. The tabled value

for dL at n = 19 and k = 5 was .66. Since the calculated

value was less than 4-dL, there was not significant

negative autocorrelation.

The residuals were also examined for heteroscedasticity.

The correlation between the absolute value of the residuals

29

and CPI is .095. At n = 19, the correlation coefficient

was not significant, meaning that the residuals did not

show significant heteroscedasticity.

CHAPTER BIBLIOGRAPHY

1. Bails, Dale G. and Larry Peppers, Business FluctuationsForecasting Techniues and Applications, NewJersey, Prentice Hall, 1982.

2. Cohen, Jacob and Patricia Cohen, Applied MultipleRegression/Correlation Analysis for the BehavioralSciences, New Jersey, Lawrence Erlbaum AssociatesPublishers, 1983.

3. Leedy, Paul D., Practical Research Planning andDesign, New York, Macmillan Publishing Company,1985.

4. Ostrom, Charles W., Time Series Analysis RegressionTechniques, Beverly Hills, Sage Publications,1978.

30

CHAPTER V

SUMMARY, FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

Summary

The purpose of this study was to examine the causal

relationship between the Venezuelan inflation and the

monetarist variables (Money, GNP, i) and the structuralist

variables (U, ER, BOP). Inflation was defined as: "A

continuously rising general price level, resulting in a

loss of the purchasing power of money" (1, p. 130).

Inflation is usually measured through a price index--

weighted average of a whole range of prices in the economy.

The data employed in this study comprised one time

series consisting of nineteen annual observations

(1964-1982). The independent variable (CPI) was measured

by using the index number reported in the International

Financial Statistic Yearbook, 1984 (IFS). The independent

variables, money supply and real output (GNP) were measured

by using the bolivar (national currency) volume as published

in the IFS. To measure the independent variables, interest

rate, unemployment and exchange rate, the rates as published

in the IFS were used. And, to measure the independent,

variable balance of payments (BOP), surplus or depreciation

figures as reported in the IFS were used.

31

32

The six hypotheses formulated for this study were as

follows.

1. There will be a significant positive relationship

between money supply and the inflation rate.

2. There will be a significant negative relationship

between real output (GNP) and the inflation rate.

3. There will be a significant positive relationship

between nominal interest rates and the inflation rate.

4. There will be a significant negative relationship

between unemployment and the inflation rate.

5. There will be a signficiant relationshp between the

exchange rate and the inflation rate.

6. There will be a significant relationship between

the balance of payments (BOP) and the inflation rate.

All of these hypotheses are shown in an operational form in

Appendix A, Table III.

The postulates that served as basis for the formulation

of these hypotheses were as follows:

1. Inflation is originated by a more rapid increase in

the money supply than in real output. The excess supply of

money ends up as an excess demand for current goods and

services, and prices must rise until the demand and supply

for money are once again in equilibrium (2). Therefore,

inflation results from a continued rise in the money supply.

33

2. Economies that experience lower rates of output

growth tend to have higher rates of inflation because they

cannot assimulate most of their monetary growth. Thus,

inflation is related to poor or slower real output growth.

3. An increase in the money supply would initially

reduce interest rates. This excess supply of money leads to

increasing aggregate demand and income, which would increase

the demand for loans and also liquidity preferences.

However, even in the short run, some price increases would

also occur. In the long run, inflationary expectations

catch up with actual inflation, and nominal interests rates

end up higher than they started (2). Therefore, interest

rates and the inflation rate are related to some extent.

4. Inflation is more likely to occur when unemployment

falls very low. However, a small rise in unemployment is

less likely to restrain inflation when the economy is

operating below capacity than when the economy is operating

nearer to full employment (3). Thus, changes in the

unemployment rate have some influence on the inflation rate.

5. There is a causal link between changes in domestic

prices and changes of the exchange rate. Exchange rate

depreciation causes internal prices to rise, and exchange

rate appreciation causes internal prices to fall.

Therefore, inflation and exchange rate movements bear a

functional relation to one another (4).

34

6. When a country runs a chronic balance of payments

surplus, its currency is undervalued.. Thus, its exchange

rate will appreciate, causing a reduction of the inflation

rate. On the other hand, if the country experiences a

chronic balance of payments deficit, its currency is over-

valued. Therefore, its exchange rate will depreciate and

will consequently drive the inflation rate up. Thus,

there is a causal influence between the balance of payments

and inflation.

Findings

A statistical analysis of the results obtained from

the application of the multiple regression technique to

the data used in this study revealed the following:

1. There was a significant positive relationship

between money supply and inflation.

2. There was a significant negative relationship

between real output (GNP) and inflation.

3. There was not a significant relationship between

nominal interest rates and inflation.

4. There was not a significant relationship between

unemployment and inflation.

5. There was not a significant relationship between

the exchange rate and inflation.

35

6. There was not a significant relationshp between

the balance of payments (BOP) and inflation.

Conclusions

According to the findings outlined above, a

significant positive relationship exists between inflation

and the monetarist variables, money and real output (GNP),

but not between inflation and interest rates. Also, no

relationship exists between inflation and the structuralist

variables, unemployment, exchange rate, and balance of

payments (BOP).

These findings support the first and second hypotheses

but do not support the others. Therefore, a conclusion

arrived to in this study is that the Venezuelan inflation

(1964-1982) is better explained by the monetarist theory.

Recommendations

It is considered that the following suggestions might

be of some contribution to similar future studies.

1. An investigation of inflation in Venezuela or any

other Latin American country could be conducted by using

the same causal variables, but selecting a longer time

period to better test for effects of economic conditions

and time.

2. A more refined methodology and extended analysis

could be developed in order to test for the importance of

36

other factors (e.g., relative price variability, wages,

imported inflation, price expectations) as explicit

causes of inflation in this country and/or other Latin

American nations.

37

CHAPTER BIBLIOGRAPHY

1. Greenwald, Douglas, The Encyclopedia of Economics, NewYork, McGraw Hill, 1982.

2. McCulloch, J. Huston, Money and Inflation: A MonetaristAproach, New York, Academic Press, 1975.

3. Perkins, J.O.N., Unemployment, Inflation and NewMacroeconomic Policy, New York, St. Martin's Press,1982.

4. Spaventa, Luigi, "Feedbacks Between Exchange RateMovements and Domestic Inflation: Vicious and Notso Virtuous Cycles Old and New," InternationalSocial Science Journal, 35 (3), 1983, pp. 517-535.

APPENDIX A

38

39

TABLE III

OPERATIONAL HYPOTHESES

Coefficient ofCorrelationHypotheses

More money supply more inflation;less money supply less inflation

More GNP less inflation; less GNPmore inflation

More interest rate rises, moreinflation; less interest rate rises,less inflation

More unemployment, less inflation;less unemployment, more inflation

More depreciation of the exchange rate,more inflation; less depreciation ofthe exchange rate less inflation

More deficit of the balance of payments,more inflation; less deficit of thebalance of payments,, less inflation

r positive

r negative

r positive

r negative

r positive

r positive

APPENDIX B

40

41

TABLE IV

DATA FOR THE STUDY

CpI Money* GNP** i U- ER BOP* YrYear (1) {2) (3) (4) (5) (6) (7) (8)

1964 40.6 4,399 126.90 4.5 -- 4.5011 86 0

1965 41.3 4,489 134*57 4.5 -- 4,4997 11 0

1966 42.0 4,620 137.92 4.5 -- 4.4988 - 67 0

1967 42.0 5,237 143.18 4.5 7.7 4.5001 96 0

1968 42.5 5,699 150.19 4.5 6.3 4.4999 50 0

1969 43.6 6,186 156.89 5.5 6.5 4.4996 12 0

1970 44.7 6,732 170.63 5.0 6.3 4.4983 46 0

1971 46.1 7,868 175.79 5.0 6.0 4.5007 418 0

1972 47.4 9,467 180.58 5.0 -- 4.4000 170 0

1973 49.4 11,368 191.87 5.0 - 4.3045 611 1

1974 53.5 16,006 203.50 5.0 -- 4.2850 4,468 1

1975 58.9 23,312 215.87 7.0 7.6 4.2850 2,715 1

1976 63.4 27.105 234.80 7.0 6.0 4.2899 2,343 1

1977 68.4 34.027 250.58 7.0 4.8 4.2925 799 1

1978 73.2 38,987 255.94 7.5 4.6 4.2925 -1,065 1

1979 82.3 42,460 259.36 11.0 5.4 4.2925 4,098 1

1980 100.0 50,209 254.20 13.0 6.0 4.2925 3,763 1

1981 116.0 54,954 253.43 14.0 6.2 4.2925 - 21 1

1982 127.3 58,015 255.14 13.0 7.1 4.2925 -8,163 1

*Millions of Bolivares **Billions of Bolivares

BIBLIOGRAPHY

Books

Bails, Dale G. and Larry Peppers, Business FluctuationsForecastin Techniques and Applications, New Jersey,Prentice Hall, 1982.

Baer, W. and J. Kerstenetzky (Eds.), Inflation and Growthin Latin America, New York, 1964.

Cohen, Jacob and Patricia Cohen, Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences,New Jersey, Lawrence Earlbaum Associates Publishers,1983.

Connor, L. R. and A. J. H. Morrell, Statistics in Theoryand Practice, London, Pitman, 1977.

Friedman, Irving S., Inflation a World Wide Disaster,Boston, Houghton Mifflin, 1973.

Friedman, M., Studies in the Quantity Theory of Money,Chicago, University of Chicago Press, 1956.

Jain, Chaman L., Contemporary Monetary Economics, Theoryand Policy, New York, Graceway Publishing Company,1981.

Johnson, Richard A. and Gouri K. Bhattacharyya, StatisticalConcepts and Methods, New York, Wiley, 1977.

Leedy, Paul D., Practical Research Planning and Design,New York, MacMillan Publishing Company, 1985.

Lewis Beck, Michael, Applied Regression, An Introduction,Beverly Hills, Sage Publications, 1982.

Maisel, Sherman J., Macroeconomics--Theories and Policies,New York, Norton, 1982.

Maynard, Geoffrey and W. Van Ryckeghem, A World of Infla-tion, New York, Barnes and Noble Books, 1975.

42

43

McCulloch, J. Huston, Money and Inflation: A MonetaristApproach, New York, Academic Press, 1975.

McDowall, David, et al., Interrupted Time Series Analysis,Beverly Hills, Sage Publications, 1980.

Morley, Samuel A., The Economics of Inflation, Hinsdale,Illinois, Dryden Press, 1971.

Ostrom, Charles W., Time Series Analysis: Regression

Techniques, Beverly Hills, Sage Publications, 1978.

Perkins, J. 0. N., Unemployment, Inflation and New Macro-

economic Policy, New York, St. Martin's Press, 1982.

Prebisch, Raul, The Economic Development of Latin America

and Its Principal Problems, New York, 1950.

Spector, Paul E., Research Designs, Beverly Hills, SagePublications, 1981.

Vane, Howard and John L. Thompson, Monetarist, Theory,Evidence and Policy, New York, Wiley, 1979.

Watcher, Susan M., Latin American Inflation The Monetarist-

Structuralist Debate, Massachusetts, Lexington Books,1976.

Articles

Campos, R. 0., "Two Views on Inflation in Latin America,"in A. Hirschman (Ed.), Latin American Issues, Twentieth

Century Fund, 1961, pp. 69-79.

Hanson, James A., "The Short Run Relationship between

Growth and Inflation in Latin America: A Quasi

Rational or Consistent Expectations Approach,"

American Economic Review, 70 (5), 1980, pp. 972-

989.

Harberger, A.,, "The Dynamics of Inflation in Chile," in

Measurements in Economics, edited by C. Christ,Stanford University Press, 1963.

Maynard, G. , "Inflation and Growth: Some Lessons to beDrawn from Latin American Experiences," Oxford EconomicPapers, 13 (2), 1961, pp. 184-201.

44

Spaventa, Luigi, "Feedbacks between Exchange Rate Move-

ments and Domestic Inflation: Vicious and Not So

Vicious Cycles Old and New," International Social

Science Journal, 35 (3), 1983, pp. 517-535.

Sunkel, 0. , "La Inflation Chilena: Un Enfoque Hetero-doxo," El Trimestre Economico, 25 (4), 1958

pp. 570-599.

Reports

Department of International Economic and Social Affairs,

Statistical Office, Statistical Yearbook--AnnuaireStatistique, New York, United Nations, 1974 and

1982.

International Monetary Fund, International FinancialStatistic Yearbook, Washington D.C., PublicationsUnit, 1984.

Encyclopedia Articles

Greenwald, Douglas, "Balance of Payments," "Exchange Rate,"

"Interest Rate," and "Unemployment," The Encyclopedia

of Economics, New York, McGraw Hill, 1982.

"Money Supply," The Encyclopedia of Economics, Connecticut,D. P. G. Reference Publishing, Inc., 1981.

Pearce, David W., "Balance of Payments Trade," Dictionary

of Modern Economics, Cambridge, Massachusetts, MIT

Press, 1983.

Unpublished Materials

Rodriguez, M. A.,"Inflation, the Balance of Payments,

and Real Output in Venezuela," unpublished Doctoral

Dissertation, Yale University, 1983.