Money as an indicator for inflation and output in Chile - not anymore?
AbstractThis paper identifies the information content of monetary aggregates for output and inflation in Chile, using a large set of reduced-form statistics and regression specifications. Unlike almost all previous studies on money in Chile, we compare 10 traditional and new definitions of money, rather than just looking at the customary definition M1A. Also, given the changes in the financial system and disinflation in Chile over the last 20 years, as well as contrasting growth rates of GDP and narrow money in recent times, we report recursive estimations for all our statistics to highlight parameter constancy. While there seems to be a strong and often one-to-one association between money growth and inflation on average over the whole sample as indicated by Nelson (2003) type regressions, the relation drops strongly during the last 10 years, and thus seems much lower in times of low inflation. Also, an increase in nominal money growth never causes acceleration of inflation in a Granger sense. However, we do find a significant and positive impact of deviations from (an estimated or HP-filtered) equilibrium level of money holdings on inflation, as indicated by error-correction and Pstar models. But the deviations from a simple estimated equilibrium are very large for both broad money aggregates and M1A at the end of the sample, casting some doubt on the stability of their demand relation. Accordingly, cointegration tests for the existence of a stable demand for money function over the whole sample are somewhat inconclusive. We find a strong Granger causality relationship between money and output, which however vanishes once we control for the effect of past inflation and changes in the monetary policy rate. Also, the information in lags of M1A for GDP drops strongly towards the end of the sample. More generally, M1A does not seem to merit its role as the money sum par excellence in Chile, being inferior in information content for example to Notes and Coin, or a broad money sum excluding bonds (M7 minus Central Bank documents).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 319.
Date of creation: May 2005
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-23 (All new papers)
- NEP-CBA-2005-05-23 (Central Banking)
- NEP-MAC-2005-05-23 (Macroeconomics)
- NEP-MON-2005-05-23 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Grauwe, Paul & Polan, Magdalena, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," CEPR Discussion Papers 2841, C.E.P.R. Discussion Papers.
- Phillips, Peter C B & Ouliaris, S, 1990.
"Asymptotic Properties of Residual Based Tests for Cointegration,"
Econometric Society, vol. 58(1), pages 165-93, January.
- Tom Doan, . "POTESTRESIDS: RATS procedure to perform Phillips-Ouliaris-Hansen test for Cointegration on 1st stage residuals," Statistical Software Components RTS00248, Boston College Department of Economics.
- Tom Doan, . "POTEST: RATS procedure to perform Phillips-Ouliaris-Hansen test for Cointegration," Statistical Software Components RTS00247, Boston College Department of Economics.
- Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
- Jorge Restrepo L., 2002. "Demanda de Dinero para Transacciones en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 95-104, December.
- Nelson, Edward, 2003.
"The future of monetary aggregates in monetary policy analysis,"
Journal of Monetary Economics,
Elsevier, vol. 50(5), pages 1029-1059, July.
- Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
- Peter C.B. Phillips & Mico Loretan, 1989.
"Estimating Long Run Economic Equilibria,"
Cowles Foundation Discussion Papers
928, Cowles Foundation for Research in Economics, Yale University.
- James G. MacKinnon, 1995.
"Numerical Distribution Functions for Unit Root and Cointegration Tests,"
918, Queen's University, Department of Economics.
- MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
- Friedman, Benjamin M, 1988. "Monetary Policy without Quantity Variables," American Economic Review, American Economic Association, vol. 78(2), pages 440-45, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).
If references are entirely missing, you can add them using this form.