Money and Inflation in Germany: A Cointegration Analysis

Gerd Hansen and Jeong-Ryeol Kim

Empirical Economics, 1996, vol. 21, issue 4, 16 pages

Abstract: This paper analyses the relation between money and inflation in Germany in a cost-push/demand-pull model of an open small economy by means of cointegration methods. The full-information-maximum-likelihood method of Johansen as well as structural methods are applied to data subsets and the full data set. The focus of the paper is on tests for overidentifying restrictions and for weak and strong exogeneity within these data sets. The results of the paper is that the money stock, the price level and gross national product are endogenous, whereas the interest rate and the real import price are both weakly and strongly exogenous. By means of the price cointegration relation, we illustrate how monetary targeting should react to imported inflation.

Date: 1996
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