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International Price Behavior and the Demand for Money

42 Pages Posted: 8 Jun 2004 Last revised: 26 Aug 2010

Arthur E. Gandolfi

National Bureau of Economic Research (NBER)

James R. Lothian

Gabelli School of Business, Fordham University; National Bureau of Economic Research (NBER)

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Date Written: December 1980

Abstract

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figures prominently in explanations of the international inflation process in the last 1960s and early '70s. Our major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced-form rational-expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976. The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance. The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used, GLS with a second- order correct ion for autocorrelation. We believe this produced more plausible estimates of the parameters of the long-run demand function and of the adjustment process it self.

Suggested Citation

Gandolfi, Arthur E. and Lothian, James R., International Price Behavior and the Demand for Money (December 1980). NBER Working Paper No. w0602. Available at SSRN: https://ssrn.com/abstract=275364

Arthur E. Gandolfi (Contact Author)

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James R. Lothian

Gabelli School of Business, Fordham University ( email )

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National Bureau of Economic Research (NBER)

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