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 has caused for years macroeconomic instability in the Serbian economy. Consequently, the main objective of this study is to examine the potential relation and impact between inflation and economic growth, with the variable of unemployment treated as a control variable. 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 results of the conducted empirical study, it can be noted that the growth in the Serbian economy has been linked to a moderate increase of  inflation in the short run.