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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, vol. 52(2), pages 321-330, December.
    2. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
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    5. Engel, Charles, 2000. "Long-run PPP may not hold after all," Journal of International Economics, Elsevier, vol. 51(2), pages 243-273, August.
    6. 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.
    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. Charles Engel & John H. Rogers, 1998. "Relative Price Volatility: What Role Does the Border Play?," Working Papers 0061, University of Washington, Department of Economics.
    9. William D. Nordhaus, 2000. "Alternative Methods for Measuring Productivity Growth," Cowles Foundation Discussion Papers 1282, Cowles Foundation for Research in Economics, Yale University.
    10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    11. Glen, Jack D., 1992. "Real exchange rates in the short, medium, and long run," Journal of International Economics, Elsevier, vol. 33(1-2), pages 147-166, August.
    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. Kim, Yoonbai, 1990. "Purchasing power parity : Another look at the long-run data," Economics Letters, Elsevier, vol. 32(4), pages 339-344, April.
    14. 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. Stefan Reitz & Ulf Slopek, 2009. "Non‐Linear Oil Price Dynamics: A Tale of Heterogeneous Speculators?," German Economic Review, Verein für Socialpolitik, vol. 10(3), pages 270-283, August.
    2. 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.
    3. 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.
    4. 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.
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    6. Stefan Reitz & Jan C. Rülke & Mark P. Taylor, 2011. "On the Nonlinear Influence of Reserve Bank of Australia Interventions on Exchange Rates," The Economic Record, The Economic Society of Australia, vol. 87(278), pages 465-479, September.
    7. 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.
    8. Zied Ftiti & Slim Chaouachi, 2018. "What Can We Learn About the Real Exchange Rate Behavior in the Case of a Peripheral Country?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(3), pages 681-707, September.
    9. Herwartz Helmut & Reimers Hans-Eggert, 2006. "Long-Run Links among Money, Prices and Output: Worldwide Evidence," German Economic Review, De Gruyter, vol. 7(1), pages 65-86, February.
    10. Paul De Grauwe & Marianna Grimaldi, 2014. "Heterogeneity of Agents, Transactions Costs and the Exchange Rate," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 2, pages 33-70, World Scientific Publishing Co. Pte. Ltd..
    11. Paul De Grauwe & Marianna Grimaldi, 2005. "The Exchange Rate and its Fundamentals in a Complex World," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 549-575, August.
    12. repec:onb:oenbwp:y::i:48:b:1 is not listed on IDEAS
    13. Paul De Grauwe & Marianna Grimaldi, 2014. "Exchange Rate Puzzles: A Tale of Switching Attractors," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 3, pages 71-117, World Scientific Publishing Co. Pte. Ltd..
    14. Reitz, Stefan & Taylor, Mark P., 2008. "The coordination channel of foreign exchange intervention: A nonlinear microstructural analysis," European Economic Review, Elsevier, vol. 52(1), pages 55-76, January.
    15. Helmut Herwartz & Hans‐Eggert Reimers, 2006. "Long‐Run Links among Money, Prices and Output: Worldwide Evidence," German Economic Review, Verein für Socialpolitik, vol. 7(1), pages 65-86, February.
    16. 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.
    17. Hans Genberg, 2002. "Monetary Policy in East Asia (And Elsewhere): Does Targeting Inflation Require 'Inflation Targeting'?," Working Papers 032002, Hong Kong Institute for Monetary Research.
    18. Wang, Ying & Tu, Yundong & Chen, Song Xi, 2016. "Improving inflation prediction with the quantity theory," Economics Letters, Elsevier, vol. 149(C), pages 112-115.
    19. repec:ipg:wpaper:2014-390 is not listed on IDEAS
    20. Vincenzo Costa, 2004. "Risk neutral valuation and uncovered interest rate parity in a stochastic two-country-economy with two goods," Economics Bulletin, AccessEcon, vol. 3(43), pages 1-10.
    21. Stefan Reitz & M.P Taylor, 2006. "The Coordination Channel of Foreign Exchange Intervention," Computing in Economics and Finance 2006 16, Society for Computational Economics.
    22. Stefan Reitz & Mark Taylor, 2012. "FX intervention in the Yen-US dollar market: a coordination channel perspective," International Economics and Economic Policy, Springer, vol. 9(2), pages 111-128, June.

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