IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The behavior of money and other economic variables: Two natural experiments

  • Lothian, James R.
  • McCarthy, Cornelia H.

The object of this paper is to test the performance of the quantity-theory model and the related proposition of monetary neutrality in a context in which, to use Bernanke's phraseology, "money move[d] for reasons that [were] plausibly unrelated to the current state of the economy." We investigate this question using data from two recent episodes of monetary-policy regime change - the move to floating exchange rates throughout the industrialized world following the breakdown of Bretton Woods in the early 1970s and the shift toward less expansive monetary policy that to varying degrees took place in these countries a decade or so later. The results of this exercise are highly positive. The money-price relationship that we observe is fully consistent with theory - growth shifts in the nominal stock of money and in the price level are highly correlated and bear a one-to-one relation to one another. Growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money. The classical neutrality proposition - in this context superneutrality - in general, receives strong, though not totally unambiguous, support.

If 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.

File URL: http://www.sciencedirect.com/science/article/B6V9S-4WKTWR8-6/2/0abaa871bebe05610401dc63f41dbf25
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 7 (November)
Pages: 1204-1220

as
in new window

Handle: RePEc:eee:jimfin:v:28:y:2009:i:7:p:1204-1220
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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.:

as in new window
  1. Lothian, James R, 1976. "The Demand for High-Powered Money," American Economic Review, American Economic Association, vol. 66(1), pages 56-68, March.
  2. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  3. Edward Nelson, 2008. "Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1791-1814, December.
  4. Michael R. Darby & James R. Lothian & Arthur E. Gandolfi & Anna J. Schwartz & Alan C. Stockman, 1983. "The International Transmission of Inflation," NBER Books, National Bureau of Economic Research, Inc, number darb83-1, October.
  5. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta.
  6. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
  7. Baillie, R.T. & Pecchenino, R.A., 1991. "The Search for Equilibrium Relationships in International Finance : The Case of the Monetary Model," Papers 9003, Michigan State - Econometrics and Economic Theory.
  8. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
  9. Mark Wheeler & Susan Pozo, 1997. "Is the world economy more integrated today than a century ago?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 25(2), pages 139-154, June.
  10. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
  11. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  12. Nelson Edward, 2005. "The Great Inflation of the Seventies: What Really Happened?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-50, July.
  13. Alan M. Taylor, 2000. "A Century of Purchasing-Power Parity," NBER Working Papers 8012, National Bureau of Economic Research, Inc.
  14. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
  15. Goodfriend, Marvin & King, Robert G., 2005. "The incredible Volcker disinflation," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 981-1015, July.
  16. Harry G. Johnson, 1969. "The case for flexible exchange rates, 1969," Review, Federal Reserve Bank of St. Louis, issue June, pages 12-24.
  17. John B. Carlson & Dennis L. Hoffman & Benjamin D. Keen & Robert H. Rasche, 1999. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Working Paper 9917, Federal Reserve Bank of Cleveland.
  18. Allan H. Meltzer, 2006. "From Inflation to More Inflation, Disinflation, and Low Inflation," American Economic Review, American Economic Association, vol. 96(2), pages 185-188, May.
  19. Robert P. Flood & Mark P. Taylor, 1996. "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 261-302 National Bureau of Economic Research, Inc.
  20. Anna J. Schwartz, 1987. "Secular Price Change in Historical Perspective," NBER Chapters, in: Money in Historical Perspective, pages 78-109 National Bureau of Economic Research, Inc.
  21. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  22. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: A Historical Overview," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108 National Bureau of Economic Research, Inc.
  23. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  24. Milton Friedman, 2005. "A Natural Experiment in Monetary Policy Covering Three Episodes of Growth and Decline in the Economy and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 145-150, Fall.
  25. Robert J. Barro, 1982. "United States Inflation and the Choice of Monetary Standard," NBER Chapters, in: Inflation: Causes and Effects, pages 99-110 National Bureau of Economic Research, Inc.
  26. Friedman, Milton & Schwartz, Anna J, 1991. "Alternative Approaches to Analyzing Economic Data," American Economic Review, American Economic Association, vol. 81(1), pages 39-49, March.
  27. Lothian, James R, 1985. "Equilibrium Relationships between Money and Other Economic Variables," American Economic Review, American Economic Association, vol. 75(4), pages 828-35, September.
  28. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  29. Michael R. Darby, 1981. "The Price of Oil and World Inflation and Recession," UCLA Economics Working Papers 228, UCLA Department of Economics.
  30. Klein, Benjamin, 1974. "Competitive Interest Payments on Bank Deposits and the Long-Run Demand for Money," American Economic Review, American Economic Association, vol. 64(6), pages 931-49, December.
  31. Duck, Nigel W, 1993. "Some International Evidence on the Quantity Theory of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 1-12, February.
  32. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
  33. Lawrence Goldberg & James Lothian & John Okunev, 2003. "Has International Financial Integration Increased?," Open Economies Review, Springer, vol. 14(3), pages 299-317, July.
  34. Dwyer, Gerald P. & Fisher, Mark, 2009. "Inflation and monetary regimes," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1221-1241, November.
  35. Mark P. Taylor & Ronald MacDonald, 1991. "Exchange Rate Economics: A Survey," IMF Working Papers 91/62, International Monetary Fund.
  36. Gerald P. Dwyer, Jr. & R.W. Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 32-43.
  37. P. Joyce, Joseph & Kamas, Linda, 1994. "Money and output under alternative exchange rate regimes in the USA," Journal of International Money and Finance, Elsevier, vol. 13(6), pages 679-697, December.
  38. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
  39. Crowder, William J., 1996. "The international convergence of inflation rates during fixed and floating exchange rate regimes," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 551-575, August.
  40. Boschen, John F & Weise, Charles L, 2003. " What Starts Inflation: Evidence from the OECD Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 323-49, June.
  41. R.W. Hafer, 2001. "What remains of monetarism?," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 13-33.
  42. Rolnick, Arthur J & Weber, Warren E, 1997. "Money, Inflation, and Output under Fiat and Commodity Standards," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1308-21, December.
  43. Allan H. Meltzer, 1991. "U.S. policy in the Bretton Woods era," Review, Federal Reserve Bank of St. Louis, issue May, pages 54-83.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:28:y:2009:i:7:p:1204-1220. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.