Long Run Relationship between Money, Output, and Inflation
This paper examines the long run relationship between the monetary base and other monetary aggregates with the permanent income and inflation rates predicated on the assumption that the velocity turn over of money is stable over time. Both the cusum square test and unit root test tend to confirm the absence of stability of M1 velocity. However, M2 and M3 velocity tends to be sample sensitive. Our estimation results reveal that the growth rates of monetary aggregates are strongly cointegrated with the growth rate of real GDP. There is an absence of any contemporaneous homogeneity between growth rate of money and inflation over the sample period. However, the correlation is positive and significant at six quarter lag between the current inflation and growth rate of money 18 months earlier. The error correction regression reveals that both M1 and M2 velocities are cointegrated with the yield on the 90-day Treasury and the 10 year notes. While there is evidence of strong co-integration of growth rate of M2 and GDP over the long term and subsequent periods of 1958-81, there is no evidence of co-integration in the 1982-2005, a period of low inflation in the United States. While inflation and above normal growth have tended to coincide in the past, it is important to appreciate that this can happen because growth is sometimes associated with other changes that put upward pressure on prices, not because growth is inflationary in nature. The policy makers should rethink the conventional wisdom of high growth and inflation.
Volume (Year): 61 (2008)
Issue (Month): 4 ()
|Contact details of provider:|| Postal: Via Garibaldi 4, 16124 Genova, Italy|
Phone: +39 010 27041
Fax: +39 010 2704222
Web page: http://www.iei1946.it/it/index.php
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ris:ecoint:0019. 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: (Angela Procopio)
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.