Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-23T06:37:58.108Z Has data issue: false hasContentIssue false
  • English
  • Français

THE QUANTITY THEORY REVISITED: A NEW STRUCTURAL APPROACH

Published online by Cambridge University Press:  30 July 2013

Makram El-Shagi ,
Sebastian Giesen  and
Logan J. Kelly
Makram El-Shagi*
Affiliation:
Halle Institute for Economic Research
Sebastian Giesen
Affiliation:
Halle Institute for Economic Research
Logan J. Kelly
Affiliation:
University of Wisconsin, River Falls
*
Address correspondence to: Makram El-Shagi, Halle Institute for Economic Research, Kleine Märkerstraße 8, D-06108 Halle (Saale), Germany; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a unified identification scheme to identify monetary shocks and track their propagation through the economy. We combine three approaches dealing with the consequences of monetary shocks. First, we adjust a state space version of the P-star type model employing money overhang as the driving force of inflation. Second, we identify the contemporaneous impact of monetary policy shocks by applying a sign restriction identification scheme to the reduced form given by the state space signal equations. Third, to ensure that our results are not distorted by the measurement error exhibited by the official monetary data, we employ the Divisia M4 monetary aggregate provided by the Center for Financial Stability. Our approach overcomes one of the major difficulties of previous models by using a data-driven identification of equilibrium velocity. Thus, we are able to show that a P-star model can fit U.S. data and money did indeed matter in the United States.

Keywords

Divisia MoneyState Space DecompositionSign Restrictions
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 1 , January 2015 , pp. 58 - 78
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Anderson, R.G. and Jones, B.E. (2011) A comprehensive revision of the monetary services (Divisia) indexes for the United States. Federal Reserve Bank of St. Louis Review September/October, 325–359.Google Scholar
Anderson, R. and Rasche, R. (2000) Retail sweep programs and bank reserves, 1994–1999. Federal Reserve Bank of St. Louis Review January/February, 51–72.CrossRefGoogle Scholar
Barnett, W., Liu, J., Mattson, R., and van den Noort, J. (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24 (1), 101–124.CrossRefGoogle Scholar
Barnett, W.A. (1978) The user cost of money. Economics Letters 1 (2), 145–149.CrossRefGoogle Scholar
Barnett, W.A. (1980) Economic monetary aggregates: An application of index number and aggregation theory. Journal of Econometrics 14 (1), 11–48.CrossRefGoogle Scholar
Barnett, W.A. (1991) A reply to Julio J. Rotemberg. In Belongia, M. T. (ed.), Monetary Policy on the 75th Anniversary of the Federal Reserve System, pp. 189–222. Proceedings of the Fourteenth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis. New York: Kluwer.CrossRefGoogle Scholar
Barnett, W.A., Chae, U., and Keating, J.W. (2005) The discounted economic stock of money with VAR forecasting. Annals of Finance 2 (2), 229–258.CrossRefGoogle Scholar
Barnett, W.A. and Chauvet, M. (2011) How better monetary statistics could have signaled the financial crisis. Journal of Econometrics 161 (1), 6–23.CrossRefGoogle Scholar
Barnett, W.A., Keating, J.W., and Kelly, L.J. (2008) Toward a bias corrected currency equivalent index Economics Letters 100 (3), 448–451.CrossRefGoogle Scholar
Barnett, W.A. and Serletis, A. (2000) The Theory of Monetary Aggregation. Contributions to Economic Analysis. Amsterdam: Elsevier.CrossRefGoogle Scholar
Belongia, M. and Ireland, P. (2012) The Barnett Critique after Three Decades: A New Keynesian Analysis. NBER working paper 17885.CrossRefGoogle Scholar
Bernanke, B.S. and Mihov, I. (1998) Measuring monetary policy. Quarterly Journal of Economics 113 (3), 869–902.CrossRefGoogle Scholar
Beveridge, S. and Nelson, C.R. (1981) A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle. Journal of Monetary Economics 7 (2), 151–174.CrossRefGoogle Scholar
Canova, F. and De Nicoló, G. (2002) Monetary disturbances matter for business fluctuations in the G-7. Journal of Monetary Economics 49 (6), 1131–1159.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M., and Evans, C.L. (1999) Monetary policy shocks: What have we learned and to what end? In Handbook of Macroeconomics, vol. 1. Amsterdam: Elsevier.Google Scholar
Christiano, L.J., Eichenbaum, M., and Evans, C. (1996) The effects of monetary policy shocks: Evidence from the flow of funds. Review of Economics and Statistics 78 (1), 16–34.CrossRefGoogle Scholar
Chrystal, K. and MacDonald, R. (1994) Empirical evidence on the recent behavior and usefulness of simple-sum and weighted measures of the money stock. Federal Reserve Bank of Saint Louis Review March/April, 73–73.CrossRefGoogle Scholar
Davidson, R. and MacKinnon, J.G. (2006) Bootstrap methods in econometrics. In Patterson, K. and Mills, T. C. (eds.), Palgrave Handbooks of Econometrics, vol. 1 of Econometric Theory, chap. 25. Houndmills, UK: Palgrave Macmillan.Google Scholar
Dreger, C. and Wolters, J. (2009) Money velocity and asset prices in the euro area. Empirica 36 (1), 51–63.CrossRefGoogle Scholar
Dutkowsky, D. and Cynamon, B. (2003) Sweep programs: the fall of M1 and rebirth of the medium of exchange. Journal of Money, Credit and Banking 35 (2), 263–279.CrossRefGoogle Scholar
Elliott, G., Rothenberg, T.J., and Stock, J.H. (1996) Efficient tests for an autoregressive unit root. Econometrica 64 (4), 813–836.CrossRefGoogle Scholar
El-Shagi, M. (2011) Did the crisis affect potential output? Applied Economics Letters 18 (8), 735–738.CrossRefGoogle Scholar
El-Shagi, M. and Giesen, S. (2013) Money and inflation: Consequences of the recent monetary policy. Journal of Policy Modeling 35 (4), 520–537.CrossRefGoogle Scholar
Faust, J. (1998) The robustness of identified VAR conclusions about money. Carnegie–Rochester Conference Series on Public Policy 49, 207–244.CrossRefGoogle Scholar
Fry, R. and Pagan, A. (2007) Some Issues in Using Sign Restrictions for Identifying Structural VARs. Working paper 14, NCER.Google Scholar
Fry, R. and Pagan, A. (2010) Sign Restrictions in Structural Vector Autoregressions: A Critical Review. Working paper 22/2010, CAMA.Google Scholar
Gerlach, S. and Smets, F. (1999) Output gap and monetary policy in the EMU area. European Economic Review 43 (4–6), 801–812.CrossRefGoogle Scholar
Gerlach, S. and Svensson, L.E.O. (2003) Money and inflation in the euro area: A case for monetary indicators? Journal of Monetary Economics 50 (8), 1649–1672.CrossRefGoogle Scholar
Gordon, D.B. and Leeper, E.M. (1994) The dynamic impacts of monetary policy: An exercise in tentative identification. Journal of Political Economy 102 (6), 1228–1247.CrossRefGoogle Scholar
Hallman, J.J., Porter, R.D., and Small, D.H. (1991) Is the price level tied to the M2 monetary aggregate in the long run? American Economic Review 81 (4), 841–858.Google Scholar
Ireland, P.N. (2004) A method for taking models to the data. Journal of Economic Dynamics and Control 28 (6), 1205–1226.CrossRefGoogle Scholar
Kaufmann, S. and Kugler, P. (2008) Does money matter for inflation in the euro area? Contemporary Economic Policy 26 (4), 590–606.CrossRefGoogle Scholar
Kelly, L.J. (2009) The Stock of Money and Why You Should Care. Bingley, UK: Emerald Group Publishing.CrossRefGoogle Scholar
Kelly, L.J., Barnett, W.A., and Keating, J.W. (2011) Rethinking the liquidity puzzle: Application of a new measure of the economic money stock. Journal of Banking and Finance 35 (4), 768–774.CrossRefGoogle Scholar
Leeper, E. and Gordon, D. (1992) In search of the liquidity effect. Journal of Monetary Economics 29 (3), 341–369.CrossRefGoogle Scholar
Leeper, E.M., Sims, C.A., and Zha, T. (1996) What does monetary policy do? Brookings Papers on Economic Activity 1996 (2), 1–78.CrossRefGoogle Scholar
Li, H. and Maddala, G.S. (1996) Bootstrapping time series models. Econometric Reviews 15 (2), 115–158.Google Scholar
McCandless, G.T. and Weber, W.E. (1995) Some monetary facts. Federal Reserve Bank of Minneapolis Quarterly Review 19, 2–11.Google Scholar
Nicolini, J. (1998) More on the time consistency of monetary policy. Journal of Monetary Economics 41 (2), 333–350.CrossRefGoogle Scholar
Orphanides, A. and Porter, R. (2000) P* revisited: Money-based inflation forecasts with a changing equilibrium velocity. Journal of Economics and Business 52 (1–2), 87–100.CrossRefGoogle Scholar
Pigou, A. (1912) Wealth and Welfare. London: Macmillan.Google Scholar
Pigou, A.C. (1917) The value of money. Quarterly Journal of Economics 32 (1), 38–65.CrossRefGoogle Scholar
Sims, C.A. (1980) Comparison of interwar and postwar business cycles: Monetarism reconsidered. American Economic Review 70 (2), 250–257.Google Scholar
Svensson, L.E.O. (2000) Does the P* model provide any rationale for monetary targeting? German Economic Review 1 (1), 69–81.CrossRefGoogle Scholar
Taylor, J. (1993) Discretion versus policy rules in practice. In Carnegie–Rochester Conference Series on Public Policy, vol. 39, pp. 195–214. Amsterdam: Elsevier.Google Scholar
Teles, P. and Uhlig, H. (2010) Is Quantity Theory Still Alive? NBER working paper 16393.CrossRefGoogle Scholar
Tödter, K.H. (2002) Monetary Indicators and Policy Rules in the P-Star Model. Bundesbank discussion paper 18/02.CrossRefGoogle Scholar
Uhlig, H. (2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52 (2), 381–419.CrossRefGoogle Scholar