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International Price Behavior and the Demand for Money

  • Gandolfi, Arthur E
  • Lothian, James R

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figures prominently in explanations of the international inflation process in the last 1960s and early '70s. Our major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced-form rational-expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976. The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance. The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used, GLS with a second- order correct ion for autocorrelation. We believe this produced more plausible estimates of the parameters of the long-run demand function and of the adjustment process it self.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 21 (1983)
Issue (Month): 3 (July)
Pages: 295-311

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Handle: RePEc:oup:ecinqu:v:21:y:1983:i:3:p:295-311
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  1. Jack Carr & Michael R. Darby, 1977. "The Role of Money Supply Shocks in the Short-Run Demand for Money," UCLA Economics Working Papers 098, UCLA Department of Economics.
  2. Bordo, Michael David & Jonung, Lars, 1981. "The Long Run Behavior of the Income Velocity of Money in Five Advanced Countries, 1870-1975: An Institutional Approach," Economic Inquiry, Western Economic Association International, vol. 19(1), pages 96-116, January.
  3. A. S. Blinder & S. Fischer, 1978. "Inventories, Rational Expectations, and the Business Cycle," Working papers 220, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Al-Khuri, Samir & Nsouli, Saleh M., 1978. "The speed of adjustment of the actual to the desired money stock : A comparative study," European Economic Review, Elsevier, vol. 11(2), pages 181-206, August.
  5. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-80, August.
  6. Darby, Michael R, 1972. "The Allocation of Transitory Income Among Consumers' Assets," American Economic Review, American Economic Association, vol. 62(5), pages 928-41, December.
  7. Lothian, James R, 1976. "The Demand for High-Powered Money," American Economic Review, American Economic Association, vol. 66(1), pages 56-68, March.
  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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