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The Behavior of Money and Other Economic Variables: Two Natural Experiments

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  • James R. Lothian

    (Fordham University)

  • Cornelia H. McCarthy

    (Fordham University)

Abstract

The object of this paper is to test the performance of the quantity-theory model and the related proposition of monetary neutrality in a context in which, to use Bernanke's phraseology, "money move[d] for reasons that [were] plausibly unrelated to the current state of the economy." We investigate this question using data from two recent episodes of monetary-policy regime change - the move to floating exchange rates throughout the industrialized world following the breakdown of Bretton Woods in the early 1970s and the shift toward less expansive monetary policy that to varying degrees took place in these countries a decade or so later. The results of this exercise are highly positive. The money-price relationship that we observe is fully consistent with theory - growth shifts in the nominal stock of money and in the price level are highly correlated and bear a one-to-one relation to one another. Growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money. The classical neutrality proposition - in this context superneutrality - in general, receives strong, though not totally unambiguous, support.
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Suggested Citation

  • James R. Lothian & Cornelia H. McCarthy, 2003. "The Behavior of Money and Other Economic Variables: Two Natural Experiments," International Finance 0311011, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0311011
    Note: Type of Document - ; pages: 33
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    References listed on IDEAS

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    Cited by:

    1. Dwyer, Gerald P. & Fisher, Mark, 2009. "Inflation and monetary regimes," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1221-1241, November.
    2. Lothian, James R., 2016. "Purchasing power parity and the behavior of prices and nominal exchange rates across exchange-rate regimes," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 5-21.
    3. Lothian, James R., 2014. "Monetary policy and the twin crises," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 197-210.

    More about this item

    Keywords

    Money Behavior; Inflation;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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