IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdp1/4159.html
   My bibliography  Save this paper

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

Author

Listed:
  • Reimers, Hans-Eggert
  • Herwartz, Helmut

Abstract

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.

Suggested Citation

  • Reimers, Hans-Eggert & Herwartz, Helmut, 2001. "Long-Run Links Among Money, Prices, and Output: World-Wide Evidence," Discussion Paper Series 1: Economic Studies 2001,14, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:4159
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/19551/1/200114dkp.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Orphanides, Athanasios & Porter, Richard D., 2000. "P revisited: money-based inflation forecasts with a changing equilibrium velocity," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 87-100.
    2. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
    3. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
    4. de Grauwe, Paul & Grimaldi, Marianna, 2001. "Exchange Rates, Prices and Money: A Long-Run Perspective," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 289-313, October.
    5. Anindya Banerjee, 1999. "Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 607-629, November.
    6. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
    7. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
    8. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    9. James B. Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, vol. 81(Nov), pages 57-77.
    10. Herwartz, Helmut & Neumann, Michael H., 2005. "Bootstrap inference in systems of single equation error correction models," Journal of Econometrics, Elsevier, vol. 128(1), pages 165-193, September.
    11. Herwartz, Helmut & Neumann, Michael H., 2000. "Bootstrap inference in single equation error correction models," SFB 373 Discussion Papers 2000,87, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    12. Claus Brand & Nuno Cassola, 2004. "A money demand system for euro area M3," Applied Economics, Taylor & Francis Journals, vol. 36(8), pages 817-838.
    13. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
    14. Chang, Yoosoon, 2002. "Nonlinear IV unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 110(2), pages 261-292, October.
    15. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
    16. Peter Hoeller & Pierre Poret, 1991. "P-Star as an Indicator of Inflationary Pressure," OECD Economics Department Working Papers 101, OECD Publishing.
    17. Calza, Alessandro & Sousa, João, 2003. "Why has broad money demand been more stable in the euro area than in other economies? A literature review," Working Paper Series 261, European Central Bank.
    18. Claus Brand & Dieter Gerdesmeier & Barbara Roffia, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 03, European Central Bank.
    19. Bennett T. McCallum, 2001. "Analysis of the Monetary Transmission Mechanism: Methodological Issues," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 1, pages 11-59, Palgrave Macmillan.
    20. Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 1-41.
    21. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    22. Karl-Heinz Tödter & Hans-Eggert Reimers, 1994. "P-Star as a link between money and prices in Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(2), pages 273-289, June.
    23. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29.
    24. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    25. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
    26. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    27. 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 841-858, September.
    28. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    29. Brand, Claus & Gerdesmeier, Dieter & Roffia, Barbara, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 3, European Central Bank.
    30. 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.
    31. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    32. repec:bla:obuest:v:61:y:1999:i:0:p:607-29 is not listed on IDEAS
    33. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    34. Yoosoon Chang & Wonho Song, 2002. "Panel Unit Root Tests in the Presence of Cross-Sectional Dependency and Heterogeneity," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-2, International Conferences on Panel Data.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Özgür Aslan & Levent Korap, 2007. "Testing Quantity Theory of Money for the Turkish Economy," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 1(2), pages 93-109.
    2. Zia-Ur- Rahman, 2019. "Influence of Excessive Expenditure of the Government in Perspective of Interest Rate and Money Circulation Which in Turn Affects the Growing Process in Pakistan," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 6(2), pages 120-129.
    3. El-Shagi, Makram & Giesen, Sebastian, 2013. "Money and inflation: Consequences of the recent monetary policy," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 520-537.
    4. Gregory N. Price & Juliet U. Elu, 2014. "Does regional currency integration ameliorate global macroeconomic shocks in sub-Saharan Africa? The case of the 2008-2009 global financial crisis," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(5), pages 737-750, September.
    5. El-Shagi, Makram & Giesen, Sebastian & Kelly, Logan J., 2015. "The Quantity Theory Revisited: A New Structural Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 58-78, January.
    6. P., Srinivasan & M., Kalaivani, 2013. "On the Temporal Causal Relationship between Macroeconomic Variables: Empirical Evidence from India," MPRA Paper 46803, University Library of Munich, Germany.
    7. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank.
    8. Tomáš Urbanovský, 2017. "Granger Causalities Between Interest Rate, Price Level, Money Supply and Real Gdp in the Czech Republic," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(2), pages 745-757.
    9. El-Shagi, Makram & Giesen, Sebastian & Kelly, Logan J., 2012. "Monetary Policy in a World Where Money (Also) Matters," IWH Discussion Papers 6/2012, Halle Institute for Economic Research (IWH).
    10. Yazdan Naghdi & Nasibeh Kakoei, 2011. "Money and Inflation in Iran: Evidence from P* Model," Journal of Economics and Behavioral Studies, AMH International, vol. 3(5), pages 311-316.
    11. Srinivasan Palamalai & Kalaivani Mariappan & Christopher Devakumar, 2014. "On the Temporal Causal Relationship Between Macroeconomic Variables," SAGE Open, , vol. 4(1), pages 21582440145, February.
    12. Graf Lambsdorff, Johann, 2004. "The puzzle with increasing money demand: Evidence from a cross-section of countries," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-28-04, University of Passau, Faculty of Business and Economics.
    13. El-Shagi, Makram & Giesen, Sebastian, 2010. "Money and Inflation: The Role of Persistent Velocity Movements," IWH Discussion Papers 2/2010, Halle Institute for Economic Research (IWH).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:bla:germec:v:7:y:2006:i::p:65-86 is not listed on IDEAS
    2. Breitung, Jörg & Pesaran, Mohammad Hashem, 2005. "Unit roots and cointegration in panels," Discussion Paper Series 1: Economic Studies 2005,42, Deutsche Bundesbank.
    3. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank.
    4. Heimonen, Kari, 2010. "Money and equity returns in the Euro area," Global Finance Journal, Elsevier, vol. 21(2), pages 152-169.
    5. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank.
    6. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    7. Kai Carstensen & Jan Hagen & Oliver Hossfeld & Abelardo Salazar Neaves, 2009. "Money Demand Stability And Inflation Prediction In The Four Largest Emu Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(1), pages 73-93, February.
    8. Carstensen, Kai, 2004. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy (IfW Kiel).
    9. Takeshi Kimura & Hiroshi Kobayashi & Jun Muranaga & Hiroshi Ugai, 2003. "The effect of the increase in the monetary base of Japan's economy at zero interest rates: an empirical analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 276-312, Bank for International Settlements.
    10. Czudaj, Robert, 2011. "P-star in times of crisis - Forecasting inflation for the euro area," Economic Systems, Elsevier, vol. 35(3), pages 390-407, September.
    11. Geweke, J. & Joel Horowitz & Pesaran, M.H., 2006. "Econometrics: A Bird’s Eye View," Cambridge Working Papers in Economics 0655, Faculty of Economics, University of Cambridge.
    12. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
    13. Shijaku, Gerti, 2016. "The role of money as an important pillar for monetary policy: the case of Albania," MPRA Paper 79088, University Library of Munich, Germany.
    14. Eilev S. Jansen, 2004. "Modelling inflation in the Euro Area," Working Paper 2004/10, Norges Bank.
    15. Christian Dreger & Dieter Gerdesmeier & Barbara Roffia, 2019. "Re‐vitalizing money demand in the Euro area. Still valid at the zero‐lower bound," Bulletin of Economic Research, Wiley Blackwell, vol. 71(4), pages 599-615, October.
    16. Paolo PAESANI, 2003. "Will the Monetary Pillar Stay? A Few Lessons from the UK," Economics Working Papers ECO2003/10, European University Institute.
    17. Piotr Kębłowski, 2016. "Canonical Correlation Analysis in Panel Vector Error Correction Model. Performance Comparison," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 8(4), pages 203-217, December.
    18. Mike Artis & Andreas Beyer, 2004. "Issues in Money Demand: The Case of Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 717-736, November.
    19. Dario Cziráky & Max Gillman, 2006. "Money Demand in an EU Accession Country: A VECM Study of Croatia," Bulletin of Economic Research, Wiley Blackwell, vol. 58(2), pages 105-127, April.
    20. Berger, Helge & Harjes, Thomas & Stavrev, Emil, 2008. "The ECB's monetary analysis revisited," Discussion Papers 2008/14, Free University Berlin, School of Business & Economics.
    21. Klaus Masuch & Sergio Nicoletti-Altimari & Massimo Rostagno & Huw Pill, 2003. "The role of money in monetary policymaking," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 158-191, Bank for International Settlements.

    More about this item

    Keywords

    Quantity theory of money; Panel cointegration analysis; Wild bootstrap inference;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdp1:4159. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/dbbgvde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.