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Is Inflation Always and Everywhere a Monetary Phenomenon?

  • De Grauwe, Paul
  • Polan, Magdalena
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    Using a sample of about 160 countries over the last thirty years we test for the quantity theory relationship between money and inflation. When analysing the full sample of countries we find a strong positive relation between the long-run inflation and money growth rate. The relation is not, however, proportional. The strong link between inflation and money growth is almost wholly due to the presence of high (or hyper-) inflation countries in the sample. The relationship between inflation and money growth for low inflation countries (on average less than 10% per annum over the last 30 years) is weak. We find that the long-run average inflation and country-specific factors have a significant influence on the strength of the relationship. We also confirm that money growth and output growth are orthogonal in the long-run; i.e. higher growth rates of money do not lead to higher growth rates of output.

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    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2841
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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2841.

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    Date of creation: Jun 2001
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    Handle: RePEc:cpr:ceprdp:2841
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    1. Boschen, John F. & Mills, Leonard O., 1988. "Tests of the relation between money and output in the real business cycle model," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 355-374.
    2. Bruce D. Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 18-32.
    3. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
    4. James H. Stock & Mark W. Watson, 1987. "Interpreting Evidence on Money-Income Causality," NBER Working Papers 2228, National Bureau of Economic Research, Inc.
    5. McCallum, Bennett T., 1984. "On low-frequency estimates of long-run relationships in macroeconomics," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 3-14, July.
    6. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
    7. Neil Wallace, 1998. "A dictum for monetary theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 20-26.
    8. Geweke, John F, 1986. "The Superneutrality of Money in the United States: An Interpretation of the Evidence," Econometrica, Econometric Society, vol. 54(1), pages 1-21, January.
    9. Terry J. Fitzgerald, 1999. "Money growth and inflation: how long is the long run?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    10. 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.
    11. Vogel, Robert C, 1974. "The Dynamics of Inflation in Latin America, 1950-1969," American Economic Review, American Economic Association, vol. 64(1), pages 102-14, March.
    12. Gerald P. Dwyer, Jr. & R.W. Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 32-43.
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