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

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.