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Long-Run Links Among Money, Prices, and Output: World-Wide Evidence

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Author Info
Reimers, Hans-Eggert
Herwartz, Helmut

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Abstract

Regarding inflation as being a monetary phenomenon in the long-run is a widely-held view in modern macro economics. We analyse this topic by means of a P-star model. Based on the quantity theory of money, this approach explains inflation via a supposed equilibrium price level (P-star), which itself depends on potential output and money. We investigate country-specific models for 110 economies, and also a pooled system thereof. We test for cointegration among money, prices, and real output. Moreover, parameter restrictions for the long-run relationships implied by the monetary theory are tested. Country specific P-star variables are constructed and the cointegration property between prices and the P-star variable is analysed. Along these lines, we find that actual prices and their P-star counterparts are cointegrated at the pooled level and thus demonstrate the importance of money for the development of prices. -- Die Aussage, dass Inflation langfristig ein monetäres Phänomen ist, ist eine grundlegende Erkenntnis der Makroökonomie. Dieser Sachverhalt wird in dieser Arbeit im Rahmen eines P-Stern-Modells analysiert. Ausgehend von der Quantitätstheorie des Geldes erklärt der P-Stern-Ansatz die Inflationsrate mit Hilfe eines berechneten Gleichgewichtspreisniveaus (P-Stern), das vom Produktionspotential und von einer Geldmenge abhängt. Wir untersuchen länderspezifische Modelle für 110 Volkswirtschaften und ein aus den Gleichungen bestehendes gepooltes System. Es wird auf Kointegration zwischen einer Geldmenge, einem Preisniveau und dem realen Output testet. Weiterhin werden die Parameterrestriktionen, die sich durch die monet¨are Theorie ergeben, für die langfristige Beziehung überprüft. Zusätzlich werden nationale P-Stern- Variablen konstruiert und es wird auf Kointegration zwischen diesen und den Preisen getestet. Im empirischen Teil finden wir, wenn die Variablen gepoolt werden, dass die aktuellen Preisniveaus mit den dazugehörenden P-Stern-Variablen kointegriert sind. Dies verdeutlicht die Wichtigkeit des Geldes für die Entwicklung der Preise.

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Publisher Info
Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2001,14.

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Date of creation: 2001
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Handle: RePEc:zbw:bubdp1:4159

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Related research
Keywords: Quantity theory of money; Panel cointegration analysis; Wild bootstrap inference;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

References listed on IDEAS
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.:

  1. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I. [Downloadable!] (restricted)
  2. Gerlach, Stefan & Svensson, Lars E O, 2002. "Money and Inflation in the Euro-Area: A Case for Monetary Indicators?," CEPR Discussion Papers 3392, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77. [Downloadable!]
  4. Claus Brand & Nuno Cassola, 2000. "A money demand system for Euro area M3," Working Paper Series 39, European Central Bank. [Downloadable!]
  5. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29. [Downloadable!]
  6. Athanasios Orphanides & Richard Porter, 1998. "P* revisited: money-based inflation forecasts with a changing equilibrium velocity," Finance and Economics Discussion Series 1998-26, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. H. Herwartz & M. Neumann, . "Bootstrap Inference in Single Equation Error Correction Models," Sonderforschungsbereich 373 2000-87, Humboldt Universitaet Berlin.
  8. Robert King & Mark W. Watson, 1992. "Testing Long Run Neutrality," NBER Working Papers 4156, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-82, August. [Downloadable!] (restricted)
  10. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September. [Downloadable!] (restricted)
  11. Günter Coenen & Juan-Luis Vega, 1999. "The demand for M3 in the euro area," Working Paper Series 6, European Central Bank. [Downloadable!]
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Cited by:
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  1. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank, Research Centre. [Downloadable!]
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