Testing the quantity theory using long-run averaged cross-country data
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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- Anna J. Schwartz, 1987.
"Secular Price Change in Historical Perspective,"
in: Money in Historical Perspective, pages 78-109
National Bureau of Economic Research, Inc.
- Burda, Michael & Wyplosz, Charles, 2009.
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- 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.
- 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.
- 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.
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