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Exchange Rates, Prices and Money. A Long Run Perspective

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In this paper we analyse the long-run proportionality and neutrality propositions between inflation and money growth and between exchange rate changes and money growth. Using a sample of 100 countries over a thirty-year period we find that the evidence in favour of these propositions is weak for the low inflation countries and very strong for the high inflation countries. We propose an explanation based on productivity shocks and transaction costs. Copyright @ 2001 by John Wiley & Sons, Ltd. All rights reserved.
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  • Paul De Grauwe & Marianna Grimaldi, 2001. "Exchange Rates, Prices and Money. A Long Run Perspective," Working Papers 46, Oesterreichische Nationalbank (Austrian Central Bank).
  • Handle: RePEc:onb:oenbwp:46
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    1. Cheung, Yin-Wong & Lai, Kon S., 2000. "On the purchasing power parity puzzle," Journal of International Economics, Elsevier, pages 321-330.
    2. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, pages 209-224.
    3. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    4. Engel, Charles, 2000. "Long-run PPP may not hold after all," Journal of International Economics, Elsevier, pages 243-273.
    5. Ardeni, Pier Giorgio & Lubian, Diego, 1991. "Is there trend reversion in purchasing power parity?," European Economic Review, Elsevier, vol. 35(5), pages 1035-1055, July.
    6. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, pages 121-144.
    7. Kim, Yoonbai, 1990. "Purchasing Power Parity in the Long Run: A Cointegration Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 491-503, November.
    8. William D. Nordhaus, 2000. "Alternative Methods for Measuring Productivity Growth," Cowles Foundation Discussion Papers 1282, Cowles Foundation for Research in Economics, Yale University.
    9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    10. Glen, Jack D., 1992. "Real exchange rates in the short, medium, and long run," Journal of International Economics, Elsevier, pages 147-166.
    11. Kim, Yoonbai, 1990. "Purchasing power parity : Another look at the long-run data," Economics Letters, Elsevier, vol. 32(4), pages 339-344, April.
    12. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    13. William D. Nordhaus, 2000. "New Data and Output Concepts for Understanding Productivity Trends," Cowles Foundation Discussion Papers 1286, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Paul De Grauwe & Marianna Grimaldi, 2003. "Intervention in the Foreign Exchange Market in a Model with Noise Traders," Working Papers 162003, Hong Kong Institute for Monetary Research.
    2. Alagidede, Paul & Panagiotidis, Theodore, 2009. "Modelling stock returns in Africa's emerging equity markets," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 1-11, March.
    3. Slim Chaouachi & Zied Ftiti & Frederic Teulon, 2014. "Explaining the Tunisian Real Exchange: Long Memory versus Structural Breaks," Working Papers 2014-147, Department of Research, Ipag Business School.
    4. Yihui Lan, 2003. "The Long-Term Behaviour of Exchange Rates, Part II: Aspects of Exchange-Rate Economics," Economics Discussion / Working Papers 03-06, The University of Western Australia, Department of Economics.
    5. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-630, August.
    6. De Grauwe, Paul & Grimaldi, Marianna, 2005. "Heterogeneity of agents, transactions costs and the exchange rate," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 691-719, April.
    7. Reitz, Stefan & Taylor, Mark P., 2008. "The coordination channel of foreign exchange intervention: A nonlinear microstructural analysis," European Economic Review, Elsevier, pages 55-76.
    8. De Grauwe, Paul & Grimaldi, Marianna, 2006. "Exchange rate puzzles: A tale of switching attractors," European Economic Review, Elsevier, vol. 50(1), pages 1-33, January.
    9. Stefan Reitz & Mark Taylor, 2012. "FX intervention in the Yen-US dollar market: a coordination channel perspective," International Economics and Economic Policy, Springer, pages 111-128.
    10. repec:ipg:wpaper:2014-390 is not listed on IDEAS
    11. Wang, Ying & Tu, Yundong & Chen, Song Xi, 2016. "Improving inflation prediction with the quantity theory," Economics Letters, Elsevier, vol. 149(C), pages 112-115.
    12. Gande, Amar & Parsley, David C., 2005. "News spillovers in the sovereign debt market," Journal of Financial Economics, Elsevier, pages 691-734.

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