The P-star approach to the link between money and prices
This paper examines several specification errors in the M2-based P* model and develops an M1-based estimate of this model. The apparent statistical significance of M2 is shown to arise from a spurious regression that uses a non-stationary regressor and because the significance test for M2 is biased by including the influence of a lagged dependent variable whose coefficient is not normally distributed. When these problems are addressed, M2 is not statistically significant related to the price level. The M1-based P* model exhibits a significant relationship between M1 and the price level, however.
|Date of creation:||1990|
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- W. Michael Cox & Joseph H. Haslag, 1989. "The effects of financial deregulation on inflation, velocity growth, and monetary targeting," Working Papers 8907, Federal Reserve Bank of Dallas. Full references (including those not matched with items on IDEAS)
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