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Relative prices and monetary policy information variables: Long run evidence from Finland

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  • Ripatti, Antti
  • Vilmunen, Jouko

Abstract

Under certain assumptions, the permanent income model yields the result that prices of different products share common stochastic trends.We construct four price series from the components of the consumer price index, combine this four variable system with various macroeconomic variables, such as broad money (M2), nominal exchange rates, import and export prices in domestic currency etc., with the ultimate hope of capturing empirical regularities between this price structure and the proposed macroeconomic information.It is found that broad money, money market and bond yield indices, nominal exchange rates and import prices contain long-run information about the price level.We also find that the common trends of price groups cointegrate with the broad monetary aggregate and the money market yield index, indicating that these variables might be the driving forces of underlying inflation.

Suggested Citation

  • Ripatti, Antti & Vilmunen, Jouko, 1995. "Relative prices and monetary policy information variables: Long run evidence from Finland," Bank of Finland Research Discussion Papers 32/1995, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1995_032
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    References listed on IDEAS

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    1. Stephen K. McNees, 1989. "How well do financial markets predict the inflation rate?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-46.
    2. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
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