Testing the Kumara Swamy Theorem of Inflationary Gap for the Group of Twenty (G-20) Countries

This paper empirically tests the Kumara Swamy Theorem of the Inflationary Gap for the 19 countries that are included in G-20 designation over the period 1999-2012. Data were obtained from the World Bank's World Development Indicators database for each country's Money Supply, Gross National Income and Consumer Price Index, as well as the Bank of England. Results are comparable to the seminal works of Swamy (1982) and (2009) that tested the theorem on the Nigerian economy, and are consistent with recent studies by Faseruk, Bauer and Glew (2012) for countries in the North American Free Trade Agreement, and Glew, Bauer, and Faseruk (2013) for the European Union. The diverse group of countries in the G-20 allows subsamples, such as the very affluent Group of Seven (G-7) nations and the emerging nations of Brazil, Russia, India, China, and South Africa (BRICS).The Kumara Swamy Theorem of the Inflationary Gap has provided significant and notable explanatory power for the relationship between the growth of the money supply and real GNP within the current study in terms of direction. This paper provides further evidence to previous findings that the theorem is best understood as a long-term average and to disregard short-term fluctuations that ought to be corrected in the marketplace in short order. Graphical evidence demonstrates when short-term fluctuations in the inflationary gap occurred and provides explanations based on market data