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Monetary policies and low-frequency manifestations of the quantity theory

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  • Sargent, Thomas

    ()
    (New York University)

  • Surico, Paolo

    ()
    (Monetary Policy Committee Unit, Bank of England)

Abstract

To detect the quantity theory of money, we follow Lucas (1980) by looking at scatter plots of filtered time series of inflation and money growth rates and interest rates and money growth rates. Like Whiteman (1984), we relate those scatter plots to sums of two-sided distributed lag coefficients constructed from fixed-coefficient and time-varying VARs for US data from 1900-2005. We interpret outcomes in terms of population values of those sums of coefficients implied by two DSGE models. The DSGE models make the sums of coefficients depend on the monetary policy rule via cross-equation restrictions of a type that Lucas (1972) and Sargent (1971) emphasised in the context of testing the natural unemployment rate hypothesis. When the US data are extended beyond Lucas's 1955-75 period, the scatter plots mutate in ways that we attribute to prevailing monetary policy rules.

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Bibliographic Info

Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 26.

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Length: 72 pages
Date of creation: 08 Dec 2008
Date of revision:
Handle: RePEc:mpc:wpaper:0026

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Keywords: Quantity theory; policy regimes; time-varying VAR;

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Cited by:
  1. Amisano, Gianni & Fagan, Gabriel, 2010. "Money growth and inflation: a regime switching approach," Working Paper Series 1207, European Central Bank.
  2. António Rua, 2011. "Money growth and inflation in the euro area: a time-frequency view," Working Papers w201122, Banco de Portugal, Economics and Research Department.
  3. Alfred A. Haug & William G. Dewald, 2012. "Money, Output, And Inflation In The Longer Term: Major Industrial Countries, 1880–2001," Economic Inquiry, Western Economic Association International, vol. 50(3), pages 773-787, 07.
  4. Davies, Ceri & Gillman, Max & Kejak, Michal, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," Cardiff Economics Working Papers E2012/20, Cardiff University, Cardiff Business School, Economics Section.
  5. James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.

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