 Quantity theory is alive: the role of international portfolio shiftsRoberto Santis () Empirical Economics, 2015, vol. 49, issue 4, 1430 pages Abstract: We challenge the view that the relationship between money and prices is too loose in countries with low inflation rates and argue that cross-border portfolio shifts are the root cause of the volatility in real money balances. The novelty of this paper is that we model jointly in the euro area and the USA (1) the equilibrium in the money market that takes into account the cross-border portfolio shifts and (2) the equilibrium in the domestic asset markets, by finding a relation between domestic long-horizon expected stock and bond returns. We estimate a stable money demand in the long-run and find that the short-run correlation between annual inflation and model-based excess money growth is not statistically different from unity in both the euro area and the USA. We also find that the resulting long-run equity risk premium comoves counter-cyclically with quarterly real GDP growth in both economies. Copyright Springer-Verlag Berlin Heidelberg 2015 Keywords: Money demand; Asset prices; Equity risk premium; Euro area; USA; Portfolio shifts; E31; E41; E51; E52; G58; F40 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:49:y:2015:i:4:p:1401-1430 Ordering information: This journal article can be ordered from DOI: 10.1007/s00181-014-0912-9 Access Statistics for this article Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund More articles in Empirical Economics from Springer |
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