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

  • Stefan Gerlach

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.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 31.

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Length: 24 pages
Date of creation: Dec 1995
Date of revision:
Handle: RePEc:bis:biswps:31
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  1. Schwartz, Anna J, 1973. "Secular Price Change in Historical Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 243-69, Part II F.
  2. Burda, Michael & Wyplosz, Charles, 2009. "Macroeconomics: A European Text," OUP Catalogue, Oxford University Press, edition 5, number 9780199236824, March.
  3. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  4. 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.
  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. 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.
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