Macroeconomics variables and their functional relationship

macroeconomics variables and their functional relationship

Its every movement puts an impact on the performance of the economy. . Relationship between macroeconomic variables and stock market movements. The relationship between budget deficit and macroeconomic variables such as interest . The variables in his model were ratio of fiscal deficit to gross domestic product, The functional form for the model and the empirical form of the model. Who introduced macroeconomics, and what was its major objective? What are economic indicators of macro-economic variables; and why is knowledge .. undermining the clear relationship that must exist between value and price, the very.

A high rate of resource and labor utilization gives indication the economy is on an upward swing nearing its peak, whereas a low resources utilization gives the opposite indication of an economy significantly underperforming its capability, and therefore, not healthy. Fine-tuning the economy is the calculated alternating between anti-inflationary and anti-recessionary policy measures in other to keep the economy stable in the happy middle between inflation and recession and to minimize the impact on consumers of GDP fluctuations.

What is a Full-employment Economy?

An efficient economy is one that has the two pre-requisites for solving the scarcity problem in an optimal manner. First, it means the economy is in full employment, meaning all available resource, including human skills, are being engaged in production. Full employment economy is said to exist whenever the unemployment rate falls below 5.

Full employment unemployment is said to be voluntary because economists believe that at full employment, all it will take to fine jobs is a change in attitude on the part of the unemployed.

Those likely to choose voluntary unemployment when the economy is at full employment will include those between jobs-the frictional unemployment- social drop-outs, workers who leave their jobs to raise children. Second, an efficient economy must also have full production, utilization of resources where they are most appropriate and so likely to be most productive.

An efficient economy must not have significant underemployment nor underutilization of resources. But an efficient economy is by itself not synonymous with development. A country is said to be developed if it has all the elements of an efficient and healthy economy operating within a socially civilized environment including the practice of the rule of law, democracy, and justice, especially for its less politically powerful social and economic groups.

Thus unemployment frightens politicians, while macro-economists and political economists are mainly worried about inflation Seasonal unemployment is tired to seasonal occupations, and not a major concern for the economy except for those seasonal workers whose pay is too little to save up against the expected unemployment season.

Cyclical unemployment is part and parcel of a money economy, and is brought on by speculation of profits and bursts in business. Frictional unemployment is another name for labor turnover, when new workers enter the workforce as old ones retire or die and when workers change jobs.

Economists look favorably on a high rate of frictional unemployment as indication the economy is strong enough to give workers confidence to seek to match their skills to higher paying jobs, an indication of a healthy economy. Structural unemployment caused by a lag between change in production and change in labor skills and mobilitymeaning the economy becomes rigid, unable to respond to both market as well as policy incentives to change course-the lost of fine tuning ability.

Structural unemployment tends to be regional, and industry and racially-specific, not across the board, as a result, aggregate policy measures policy incentives directed at the economy as a whole is not very effective in removing pockets of structural unemployment.

But just two is enough to set of recessionary alarms and speculative reaction. The National Bureau of Statistics defines a recession as any period in which the GDP dropped for two successive quarters six months. The obvious difference is a matter of judgment, the depth of the fall in output, the severity of labor unemployment, and the Bureau's known sensitivity to the political implications of a decline in economic activity.

macroeconomics variables and their functional relationship

A protracted and severe recession is a depression. Speculative recession acts as a self-fulfilling prophesy: Because economic agents suspect there would be a recession, they adopt reactionary measures that actually trigger one, e.

macroeconomics variables and their functional relationship

Recession per se is not bad, provided the economy has no major structural constraints that might prevent it from responding to market and policy incentives to change course.

Apart from the four causes of unemployment named above, recession may occur as a result of mere business speculation and the reaction of rational consumers and producers to shield themselves from the negative impact of a future trend in the economy. Recession accompanied by unemployment is not always bad: At times, it becomes the only cure against inflation the bigger of the two evils.

The philip curve theory argues that the economy cannot stay at full employment for a long time without triggering inflation. This forces policy makers to accept unemployment to fight inflation. Inflation is particularly bad for the economy because it affects everybody and all segments of the economy, distorting prices and undermining the clear relationship that must exist between value and price, the very basis of market exchange.

Demand-pull inflation occurs whenever there is a sudden and significant jump in consumer demand which stays way ahead of supply.

A special form of cost-push inflation is market power inflation, or profit-push inflation, the result of monopolies' unchallenged ability to set prices above price equilibrium prices and to force consumers to absorb those prices. Expectation inflation is caused by an inflationary psychosis, a crippling fear of inflation that so dominates the public it forces consumers and producers into taking actions that actually trigger inflation as a self-fulfilling prophesy. Full-employment inflation is caused when demand continues to be strong when the economy is already at full employment and all available resources, including labor, is already engaged.

Supplying that demand will add to cost and prices because: To capture the consumption pattern of a typical city dweller, it was necessary to change some items in the typical basket of goods and services; some food and beverage items and medical care have been replaced by things that reflect our modern communications age like telephones, computers, and the cost of education. Increases in the CPI is both indication of increased prices as well as consumers confidence to spend money as opposed to consumers' fear of pending disaster which would cause them to safe against an uncertain future.

Increased consumer prices in the face of increased consumer confidence in the economy amounts to double jeopardy because it means consumers are buying more at a time when the purchasing power of their dollars has declined. Interest rates reach a peak just before recession, and fall throughout the recession.

Rising interest rates signal an expanding economy, and when already high interest rates begin to rise even further and faster, that is a sure sign of the on set of inflation. Fine-tuning interest rates is a key monetary instrument of government: To fight recession, lower already low interest rates.

More reserves mean more faith in an economy that automatically leads towards the more investment in the stock market by domestic and international investors. FIIs plays an important role in the Indian economy.

macroeconomics variables and their functional relationship

It is a short term investment made by international investors. It has bidirectional causation with the returns of other financial markets such as money market, stock market and foreign exchange market. It is really significant for an emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. Availability of foreign capital depends on number of firm specific factors, not only on economic development of the country. It is basically the difference between the money earns and money makes by a country.

It has an adverse relationship with the stock market.

Keynesian economics - Aggregate demand and aggregate supply - Macroeconomics - Khan Academy

Index of industrial production: It personifies the status of production in the industrial sector. It influences the stock prices through its own effect on projected cash flows; it exhibits a positive relationship with stock price changes.

In this study, it is used as a proxy of Gross Domestic Product due to unavailability of its monthly data. Inflation is not good for any economy because it affects all the segments, misrepresenting prices and threatens the clear relationship that is essential to exist between value and price of a product or service. It exhibits a negative relationship with stock markets. It curbs consumer savings and spending. When spendings are decreased, it automatically ruined the corporate profits. It adversely affects the domestic currency value in the foreign exchange markets.

It shows the difference between the monetary value of imports and exports of a country. It may be favorable or unfavorable for a country. It affects their currency relative value. The large trade deficits are perceived as problematic for an economy, but not the smaller ones. If it is favorable will generate a confidence among the investors.

They would like to invest or vice versa.

macroeconomics variables and their functional relationship

It is used as a proxy of Balance of Payment due to unavailability of its monthly data in the present study. The section II of paper represents the review of literature, section III depicts the data methodology, section IV discusses data analysis and results and section V concludes the study.

A Birds Eye View of Literature Relationship between macroeconomic variables and stock market movements Many academic researchers, financial and industry analysts and practitioners have tried to envisage the relationship between macroeconomic variables and stock market movements from the past decades. They have done several empirical and descriptive studies to check the effect of macroeconomic variables on stock prices or viceversa and the existing relationship between the two.

The different conclusions have been provided by the various conducted studies according to the selection of variables, methodologies, techniques and tests used.

Here, we discussed some previous research works and their conclusions that are related to our research work [ 13 - 21 ]. The quarterly data of index of industrial production, money supply, interest rate, exports, exchange rate, foreign direct investment, BSE Sensex and NSE Nifty were used from to Johansen cointegration test and Granger Causality test were used to check the existence of long runs and causal relationships among the variables.

To explore the short run relationships, the BVAR modeling for variance decomposition and impulse response functions has been applied. The study revealed different causal relationships between selected macroeconomic variables and stock market indices in the long run, but similar causal pattern among the variables in the short run.

The study reported bidirectional causality running from stock prices to index of industrial production, money supply, exports, exchange rate, and foreign direct investment and from interest rates to stock prices. It indicated that Indian stock market seems to be driven not only by actual performance, but also by anticipating probable performances.

The authors opined that any change in stock prices was not the mere cause of selected macroeconomic variables, but might be the changes in other non selected macroeconomic variables. The impact of domestic variables on the performance of the stock market was more as compared to global variables.

The monthly data were employed to get the results. So the investors, institutional investors, etc. The results of the study revealed both long-run and short-run linkages between the macroeconomic variables and stock market indices of both countries. The selected macroeconomic variables, i. The presence of autocorrelation was found in Indian stock market after using appropriate tests, i. The bidirectional relationship between interest rate and stock market, international stock market and BSE volume, exchange rate and stock market and exchange rate and BSE volume were observed.

It also found unidirectional causality among the international stock market and domestic stock market, interest rate and stock market, exchange rate and stock market and inflation rate and stock market. The study further revealed that Indian stock market was not a weak form efficient and investors could earn abnormal profits by considering changes in the macroeconomic variables and historical prices of stocks. Hence, the variables are stationary at order 1.

Johansen Co integration Test Series: R have values greater than the critical values at 5 percent level of significance. There is co integration at most none with at least one co integrating equation. It is a clear evidence to say that there are long run equilibrium relations among the five variables. From the equation we can see that interest rate and inflation rate are statistical significant by the 2.

Turning to the t-statistics of the coefficients for one period lagged error-correction term, it can be seen that the coefficients of exchange rate and inflation rate have a positive sign but only inflation rate is statistically significant by the 2.

Money supply and interest rate will result inversely to relatively high decrease in budget deficit by large percentage values in thousands. In addition, interest and inflation rates are statistically significant. Since there exists one co integrating vectors in the five variables of VEC model used in the co integrating tests, it is best to estimate the models with one error correction term included to capture the short and long run dynamics by performing multivariate Granger causality test for the VECM.

This means that there is a long run causal one-way relationship from exchange rate to budget deficit. As a whole, the results imply that exchange rate do influence the budget deficit output in Nigeria in the long run.

While in the long-run, interest rate influences the inflation rate. Same pattern of trend is indicated by the fig. Hence, the period of volatility tends to be follows by the periods of high and low volatility respectively. Therefore, there is evidence of unequal variance in the trend of budget deficit in Nigeria. This is statistically confirmed by the ARCH test result in the diagnostic test in table 1 above.

Conclusion and Recommendation Few are the econometric studies which have examined the relationship between budget deficit and, microeconomic variables-interest rate, exchange rate, inflation and money supply. This study analyses empirically the causal relations among interest rate, exchange rate, inflation, money supply and budget deficit in Nigeria over a period of 31 years from to Public debt has become an increasingly serious problem for Nigeria and it is due to unexamined public expenditures, bureaucracy, tax evasion and corruption.

The government debt as a percentage of GDP has begun to develop steadily since in order to reach In order to reduce its debt burden, Nigeria has to focus on fiscal policy measures. These fiscal policy measures can be changes in tax rate, government consumption and public expenditures.

The results show that we get a unilateral causal relationship in the long run from exchange rate to budget deficit and from budget deficit to exchange rate while there is no causation between interest rate, money supply and inflate rate In the long run there is a causal bi-directional relationship from exchange rate to inflation. Money supply was found to have uni- directional causal effect on exchange rate. The presence of a causal link between exchange rate and budget deficit has implications of great importance on development strategies for developing countries.

If exchange rate causes budget deficit, budget deficit will be a necessary condition for the country to expand its exchange rate even more. W, and Miller S. Journal of Economics, Vol. Contemporary Economic Policy, Vol. Is Public Expenditure Productive?. Journal of Monetary Economics, Vol. Journal of Monetary Economics, 20, No.

Structural Federal Deficits and Interest Rates: Some Causality and Co-integration Tests. The Role of Monetary Policy. American Economic Review, Vol. Effect, of Fiscal Deficits and Government Debt: Journal of Applied Quantitative Methods.

Fiscal Deficit, Inflation and output in Nigeria: Journal of Economic and Financial Studies, vol 2 No. D and Umo, K. The relationship between budget deficit and interest rate. European Journal of Business and Social Sciences. I and Onuorah A. Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55 2 Journal of Econometrics, 2,