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The Timing of Monetary and Price Changes and the International Transmission of Inflation

  • Anthony Cassese
  • James R. Lothian

This paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries. In the analysis we highlight the two polar cases of completely closed and open economies and draw some implications for timing between monetary expansion and inflation, inter-country comparisons of inflation rates and interest rates, and comparisons of central bank behavior. The Granger-causality test is applied in a bivariate fashion to these groups of variables. The main empirical results of our analysis are: (1) Domestic monetary expansion appears to lead inflation in the sense that money Granger-causes prices without feedback, contradicting an implication of the monetary approach to the balance of payments. (2) Hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period, providing no evidence for a generalized "law of one price." (3) Some sterilization of official reserve inflows was successfully performed by the non-reserve central banks, except for Canada. (4) U.S. interest rates Granger-cause foreign rates, providing evidence of some international transmission via asset markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0549.

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Date of creation: Sep 1980
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Publication status: published as Journal of Monetary Economics, Vol. 10, no. 1 (1982): 1-24.
Handle: RePEc:nbr:nberwo:0549
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Arthur E. Gandolfi & James R. Lothian, 1980. "International Price Behavior and the Demand for Money," NBER Working Papers 0602, National Bureau of Economic Research, Inc.
  2. Irving B. Kravis & Robert E. Lipsey, 1977. "Price Behavior in the Light of Balance of Payments Theories," NBER Working Papers 0181, National Bureau of Economic Research, Inc.
  3. Michael R. Darby, 1978. "The Monetary Approach to the Balance of Payments: Two Specious Assumptions," UCLA Economics Working Papers 136, UCLA Department of Economics.
  4. Blejer, Mario I., 1979. "On causality and the monetary approach to the balance of payments : The European experience," European Economic Review, Elsevier, vol. 12(3), pages 289-296, July.
  5. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-88, September.
  6. Williams, David & Goodhart, C A E & Gowland, D H, 1976. "Money, Income, and Causality: The U.K. Experience," American Economic Review, American Economic Association, vol. 66(3), pages 417-23, June.
  7. Putnam, Bluford H & Wilford, D Sykes, 1978. "Money, Income, and Causality in the United States and the United Kingdom: A Theoretical Explanation of Different Findings," American Economic Review, American Economic Association, vol. 68(3), pages 423-27, June.
  8. Girton, Lance & Henderson, Dale W., 1976. "Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 33-61, January.
  9. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  10. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  11. Connolly, Michael B & Taylor, Dean G, 1979. "Exchange Rate Changes and Neutralization: A Test of the Monetary Approach Applied to Developed and Developing Countries," Economica, London School of Economics and Political Science, vol. 46(183), pages 281-94, August.
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