Inflation and real exchange rate and macroeconomic gaps: causality for 50 emerging and developing countries

This article presents and tests two opposing hypotheses regarding the causality relationships between the inflation rate (as well as the real exchange rate) and macroeconomic gaps, especially the investment-domestic savings gap. For empirical purposes, the Dumitrescu and Hurlin (2012) method for Granger causality in panel data was applied to annual series from 1995 to 2014, covering a group of 50 emerging and developing countries. Furthermore, we also applied different methods for Dynamic Panel Data, specifically Difference and System GMM regressions. The empirical findings indicated a complementarity of both theoretical perspectives to explain the aforementioned relations, although these results are more robust for the conventional hypothesis.