Linkages between Inflation and Economic Growth in Serbia: an ARDL Bounds Testing Approach

In the context of measuring the effects of structural policy, the analysis of the relation of economic growth and inflation is essential for the economy of the Republic of Serbia. The high inflation rate for years has caused macroeconomic instability in the Serbian economy. We examine the effects of inflation on growth in the case of Serbia. Consequently, the main objective of this study is to examine the link between inflation and economic growth. As an appropriate methodological framework for establishing the long run relationship (cointegration) between variables, we used ARDL model, while Toda-Yamamoto procedure was used for testing the short run causality. The period of observation was from Q1 2007 to Q3 2014. The results showed the presence of the cointegration between variables in the long run, and that in the short run a unidirectional causality from inflation to economic growth was present. According to the result of the conducted empirical study, it can be noted that the price stability is essential for the sustainable growth, although economic growth has been linked to the moderate increase of inflation in the short run.