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The timing of monetary and price changes and the international transmission of inflation

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  • Cassese, Anthony
  • Lothian, James R.

Abstract

This paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries. In the analysis we highlight the two polar cases of completely closed and open economies and draw some implications for timing between monetary expansion and inflation, inter-country comparisons of inflation rates and interest rates, and comparisons of central bank behavior. The Granger-causality test is applied in a bivariate fashion to these groups of variables. The main empirical results of our analysis are: (1) Domestic monetary expansion appears to lead inflation in the sense that money Granger-causes prices without feedback, contradicting an implication of the monetary approach to the balance of payments. (2) Hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period, providing no evidence for a generalized "law of one price." (3) Some sterilization of official reserve inflows was successfully performed by the non-reserve central banks, except for Canada. (4) U.S. interest rates Granger-cause foreign rates, providing evidence of some international transmission via asset markets.
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  • Cassese, Anthony & Lothian, James R., 1982. "The timing of monetary and price changes and the international transmission of inflation," Journal of Monetary Economics, Elsevier, vol. 10(1), pages 1-23, July.
    • Handle: RePEc:eee:moneco:v:10:y:1982:i:1:p:1-23
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    Cited by:

    1. 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.
    2. Lothian, James R. & Huffman, Wallace E., 1984. "The Gold Standard And The Transmission Of Business Cycles: 1833-1933," ISU General Staff Papers 198401010800001135, Iowa State University, Department of Economics.
    3. G L Clark, 1984. "Price Shocks and the Components of Urban Inflation," Environment and Planning A, , vol. 16(12), pages 1633-1648, December.
    4. Vansteenkiste, Isabel, 2009. "What Triggers Prolonged Inflation Regimes? A Historical Analysis," Working Paper Series 1109, European Central Bank.
    5. Wallace E. Huffman & James R. Lothian, 1984. "The Gold Standard and the Transmission of Business Cycles, 1833-1932," NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 455-512, National Bureau of Economic Research, Inc.
    6. Bjorn Wahlroos, 1984. "Money and Prices in a Small Economy," Discussion Papers 611, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation In Ireland (Part 2)," Research Technical Papers 3B/RT/96, Central Bank of Ireland.

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