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Long-Run Links Among Money, Prices, and Output: World-Wide Evidence

  • Reimers, Hans-Eggert
  • Herwartz, Helmut

Regarding inflation as being a monetary phenomenon in the long-run is a widely-held view in modern macro economics. We analyse this topic by means of a P-star model. Based on the quantity theory of money, this approach explains inflation via a supposed equilibrium price level (P-star), which itself depends on potential output and money. We investigate country-specific models for 110 economies, and also a pooled system thereof. We test for cointegration among money, prices, and real output. Moreover, parameter restrictions for the long-run relationships implied by the monetary theory are tested. Country specific P-star variables are constructed and the cointegration property between prices and the P-star variable is analysed. Along these lines, we find that actual prices and their P-star counterparts are cointegrated at the pooled level and thus demonstrate the importance of money for the development of prices.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2001,14.

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Date of creation: 2001
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Handle: RePEc:zbw:bubdp1:4159
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  17. Peter Hoeller & Pierre Poret, 1991. "P-Star as an Indicator of Inflationary Pressure," OECD Economics Department Working Papers 101, OECD Publishing.
  18. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
  19. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
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