The Causal Relationship between Harmonized Consumer Price Index, Producer Price Index and Gross Domestic Product: Evidence from Kosovo

Abstract

The authors have conducted an empirical study of the relevant relationship based on the assumption that the consumer price index (CPI) and producer price index (PPI), respectively, have an impact on the gross domestic product (GDP), the economic growth of a country, and vice versa. They also examined the development trend of these significant macroeconomic indicators in Kosovo as a developing country. Uddin and Rahman (2022) have shown that the emerging nations should address the issue of inflation by maintaining the inflation rate in single digits; this would lead to economic progress. The study was prepared based on quarterly time series data from 2010: Q1 to 2022: Q3. The data were analyzed using EViews ver10. The model was examined using the ADF test, Johansen cointegration test, VECM estimation, and Granger causality test. Several statistical techniques were applied to examine the existence of causal linkages, stationarity, and long-term relationships among the model’s variables. Positive results from the analysis imply that the model is stable. The results of the ADF test specifically show that GDP, HICP, and PPI remain stationary when the initial difference is considered. The Johansen cointegration test also supports a long-term relationship between these variables. The Granger analysis results demonstrate a bilateral relationship between GDP and HICP and that the alternative hypothesis is accepted. The findings for GDP and PPI indicate that there is no meaningful causal or unilateral relationship between them. This research complements prior studies in the disciplines of finance and macroeconomics by emphasizing that the findings of this study show that the government of Kosovo should try to control the influence of the consumer price index and the producer price index on GDP.