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Long‐Run Links among Money, Prices and Output: Worldwide Evidence

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  • Helmut Herwartz
  • Hans‐Eggert Reimers

Abstract

. Starting from the quantity theory of money we analyse the dynamic relationships between money, real output and prices for an unbalanced panel of 110 economies. Complementary to trivariate analyses we also adopt a P‐star model explaining inflation via an equilibrium price level (P‐star), which in turn depends on potential output and money. A key issue of the paper is the cross‐sectional stability of estimation and inference results. We find cointegration among the considered variables. Particularly for high inflation countries homogeneity between prices and money cannot be rejected. Given homogeneity we find evidence for an error‐correction mechanism linking current price changes and the lagged price gap. Parameter estimates indicating the adjustment towards the price equilibrium are larger in absolute value for high inflation countries. The latter results indicate that central banks, even in high inflation countries, can improve price stability by controlling monetary growth.

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  • Helmut Herwartz & Hans‐Eggert Reimers, 2006. "Long‐Run Links among Money, Prices and Output: Worldwide Evidence," German Economic Review, Verein für Socialpolitik, vol. 7(1), pages 65-86, February.
  • Handle: RePEc:bla:germec:v:7:y:2006:i:1:p:65-86
    DOI: 10.1111/j.1468-0475.2006.00147.x
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    2. Srinivasan Palamalai & Kalaivani Mariappan & Christopher Devakumar, 2014. "On the Temporal Causal Relationship Between Macroeconomic Variables," SAGE Open, , vol. 4(1), pages 21582440145, February.

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    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; Dynamic Treatment Effect Models; Diffusion Processes

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