Does Quantity Theory of Money Hold in Kazakhstan?
Evidence Based on Cointegration Tests
Razzaque H Bhatti
Professor
Bang College of Business
KIMEP University
2 Abai Avenue Office #329, Dostyk Building
Almaty 050010, Kazakhstan
Tel: +7(727) 2-70-44-40 Ext.
Abstract
This paper investigates whether the quantity theory of money holds in Kazakhstan in the long
run using quarterly data on consumer prices, gross domestic product, narrow money (M1) and
broad money (M2 and M3) over the period 1994q1-2009q4. Employing two residual based
cointegration tests of Engle and Granger (1987) and Phillips and Ouliaris (1990), results are
produced rejecting significantly the null of no cointegration (long-run relationship) between
prices, money supply (M1, M2 and M3) and real output in all cases when the latter test is
used rather when the former test is used. The results are consistent with the quantity theory
of money, since the coefficients on money supply and real income are correctly signed in all
cases. However, the quantity theory of money holds precisely only in one case when M1 is used
since the proposition that there is a proportionate relationship between prices and money cannot
be rejected on the basis of the West (1988) corrected t statistic. An important implication that
emerges from these results is that monetary policy plays an important role in affecting prices in
Kazakhstan.