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Quantity theory is alive: the role of international portfolio shifts

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  • Roberto Santis

Abstract

We challenge the view that the relationship between money and prices is too loose in countries with low inflation rates and argue that cross-border portfolio shifts are the root cause of the volatility in real money balances. The novelty of this paper is that we model jointly in the euro area and the USA (1) the equilibrium in the money market that takes into account the cross-border portfolio shifts and (2) the equilibrium in the domestic asset markets, by finding a relation between domestic long-horizon expected stock and bond returns. We estimate a stable money demand in the long-run and find that the short-run correlation between annual inflation and model-based excess money growth is not statistically different from unity in both the euro area and the USA. We also find that the resulting long-run equity risk premium comoves counter-cyclically with quarterly real GDP growth in both economies. Copyright Springer-Verlag Berlin Heidelberg 2015

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  • Roberto Santis, 2015. "Quantity theory is alive: the role of international portfolio shifts," Empirical Economics, Springer, vol. 49(4), pages 1401-1430, December.
    • Handle: RePEc:spr:empeco:v:49:y:2015:i:4:p:1401-1430
    DOI: 10.1007/s00181-014-0912-9
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    More about this item

    Keywords

    Money demand; Asset prices; Equity risk premium; Euro area; USA; Portfolio shifts; E31; E41; E51; E52; G58; F40;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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