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Domestic money and US output and inflation

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  • Aksoy, Yunus
  • Piskorski, Tomasz

Abstract

Recent empirical research found that the strong short-term relationship between monetary aggregates and US real output and inflation, as outlined in the classical study by M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of the B. Friedman and Kuttner (1992) information value approach, we reevaluate the vanishing relationship between US monetary aggregates and these macroeconomic fundamentals by taking into account the international currency feature of the US dollar. In practice, by using official US data for foreign flows constructed by Porter and Judson (1996) we find that domestic money (currency component of M1 corrected for the foreign holdings of dollars) contains valuable information about future movements of US real output and inflation. Statistical evidence here provided thus suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2001/08.

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Date of creation: 2001
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Handle: RePEc:zbw:cfswop:200108

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Keywords: Foreign holdings; US monetary aggregates; Information value; Friedman-Schwartz's evidence;

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References

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  1. Jefferson, Philip N., 1998. "Seigniorage payments for use of the dollar: 1977-1995," Economics Letters, Elsevier, Elsevier, vol. 58(2), pages 225-230, February.
  2. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 2, Board of Governors of the Federal Reserve System (U.S.).
  3. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A price target for U.S. monetary policy? Lessons from the experience with money growth targets," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago WP-96-14, Federal Reserve Bank of Chicago.
  4. Benjamin M. Friedman, 2000. "The Role of Interest Rates in Federal Reserve Policymaking," NBER Working Papers 8047, National Bureau of Economic Research, Inc.
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  14. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 45-59, January.
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  16. Kenneth Rogoff, 1998. "Blessing or curse? Foreign and underground demand for euro notes," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 261-303, 04.
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Cited by:
  1. Fischer, Björn & Köhler, Petra & Seitz, Franz, 2004. "The demand for euro area currencies: past, present and future," Working Paper Series, European Central Bank 0330, European Central Bank.

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