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Testing the quantity theory using long-run averaged cross-country data

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  • Stefan Gerlach

Abstract

Using data from Barro (1990), Dwyer and Hafer (1988), Duck (1993) and Vogel (1974), we revisit the finding that cross-sectional regressions of long-run average inflation on money growth and real income growth support the quantity theory, and conclude that, as is frequently argued, this depends on the inclusion in the sample of a few countries with very high money growth. The most likely reason for the rejection of the theory when these data points are excluded is simultaneity bias, the importance of which is mitigated when high-inflation countries are included in the sample. Omitted variables bias may also play a role, but measurement errors are unlikely to do so.

Suggested Citation

  • Stefan Gerlach, 1995. "Testing the quantity theory using long-run averaged cross-country data," BIS Working Papers 31, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:31
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    References listed on IDEAS

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    1. Lothian, James R, 1985. "Equilibrium Relationships between Money and Other Economic Variables," American Economic Review, American Economic Association, vol. 75(4), pages 828-835, September.
    2. 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.
    3. 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.
    4. Burda, Michael & Wyplosz, Charles, 2017. "Macroeconomics: a European Text," OUP Catalogue, Oxford University Press, edition 7, number 9780198737513.
    5. Duck, Nigel W., 1988. "Money, output and prices: : An empirical study using long-term cross country data," European Economic Review, Elsevier, vol. 32(8), pages 1603-1619, October.
    6. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-1014, December.
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    Cited by:

    1. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Money growth, output gaps and inflation at low and high frequency: Spectral estimates for Switzerland," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 411-435, February.
    2. Gerlach, Stefan, 2003. "The ECB's Two Pillars," CEPR Discussion Papers 3689, C.E.P.R. Discussion Papers.
    3. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 389-439, October.

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