The N.A.F.T.A. Evidence on Testing the Kumara Swamy Theorem of Inflationary Gap

Journal of Financial Management and Analysis Volume 25 No. 2 (July-December, 2012)

Posted: 8 Apr 2013

See all articles by Alex Faseruk

Alex Faseruk

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Larry Bauer

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Ian Glew

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: March 24, 2013

Abstract

This paper empirically tests the Kumara Swamy Theorem of the Inflationary Gap for the U.S.A, Canada and Mexico, the three countries that constitute the North American Free Trade Agreement (NAFTA), over the period 1997-2011. The study obtained data 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 Statistics Canada’s CANSIM database. Results were compared to the seminal works of Swamy (1982 and 2009) that tested the Theorem for the Nigerian economy, as well as recent studies by Lazaridis and Livanis (2010) for the Cypriot and Greek economies, and Bauer and Faseruk (2012) for the Canadian economy. For the U.S.A., Canada and Mexico, the Kumara Swamy Theorem of the Inflationary Gap has provided notable explanatory power for the relationship between the growth of the money supply and real G.N.P. The American economy displayed the lowest inflationary gap and the Mexican economy the highest with the Canadian economy in between, but more in line with the American experience. This paper argues that the Theorem is best understood as a long-term average and to disregard short-term fluctuations. Graphical evidence demonstrates that short-term fluctuations in the inflationary gap, either positive or negative, revert to the mean in subsequent years, although the speed of adjustment varies from country to country.

Keywords: Inflationary gap, N.A.F.T.A., Kumara Swamy Theorem

JEL Classification: C82, E31, E52, E58

Suggested Citation

Faseruk, Alex and Bauer, Larry and Glew, Ian, The N.A.F.T.A. Evidence on Testing the Kumara Swamy Theorem of Inflationary Gap (March 24, 2013). Journal of Financial Management and Analysis Volume 25 No. 2 (July-December, 2012), Available at SSRN: https://ssrn.com/abstract=2238595

Alex Faseruk (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada

Larry Bauer

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, NL A1B 3X5
Canada
709-864-8512 (Phone)

Ian Glew

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada

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