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The timing of monetary and price changes and the international transmission of inflation

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  • Cassese, Anthony
  • Lothian, James R.

Abstract

This paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries. In the analysis we highlight the two polar cases of completely closed and open economies and draw some implications for timing between monetary expansion and inflation, inter-country comparisons of inflation rates and interest rates, and comparisons of central bank behavior. The Granger-causality test is applied in a bivariate fashion to these groups of variables. The main empirical results of our analysis are: (1) Domestic monetary expansion appears to lead inflation in the sense that money Granger-causes prices without feedback, contradicting an implication of the monetary approach to the balance of payments. (2) Hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period, providing no evidence for a generalized "law of one price." (3) Some sterilization of official reserve inflows was successfully performed by the non-reserve central banks, except for Canada. (4) U.S. interest rates Granger-cause foreign rates, providing evidence of some international transmission via asset markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 10 (1982)
Issue (Month): 1 (July)
Pages: 1-23

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Handle: RePEc:eee:moneco:v:10:y:1982:i:1:p:1-23

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Williams, David & Goodhart, C A E & Gowland, D H, 1976. "Money, Income, and Causality: The U.K. Experience," American Economic Review, American Economic Association, vol. 66(3), pages 417-23, June.
  2. Arthur E. Gandolfi & James R. Lothian, 1980. "International Price Behavior and the Demand for Money," NBER Working Papers 0602, National Bureau of Economic Research, Inc.
  3. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  4. Girton, Lance & Henderson, Dale W., 1976. "Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 33-61, January.
  5. Putnam, Bluford H & Wilford, D Sykes, 1978. "Money, Income, and Causality in the United States and the United Kingdom: A Theoretical Explanation of Different Findings," American Economic Review, American Economic Association, vol. 68(3), pages 423-27, June.
  6. Michael R. Darby, 1978. "The Monetary Approach to the Balance of Payments: Two Specious Assumptions," UCLA Economics Working Papers 136, UCLA Department of Economics.
  7. Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, vol. 8(2), pages 193-246, May.
  8. Connolly, Michael B & Taylor, Dean G, 1979. "Exchange Rate Changes and Neutralization: A Test of the Monetary Approach Applied to Developed and Developing Countries," Economica, London School of Economics and Political Science, vol. 46(183), pages 281-94, August.
  9. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-88, September.
  10. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  11. Blejer, Mario I., 1979. "On causality and the monetary approach to the balance of payments : The European experience," European Economic Review, Elsevier, vol. 12(3), pages 289-296, July.
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Cited by:
  1. Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation In Ireland (Part 2)," Research Technical Papers 3B/RT/96, Central Bank of Ireland.
  2. Bjorn Wahlroos, 1984. "Money and Prices in a Small Economy," Discussion Papers 611, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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