Quantity theory is alive: the role of international portfolio shifts

Roberto De Santis ()

No 1435, Working Paper Series from European Central Bank

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 United States (i) the equilibrium in the money market that takes into account the cross-border portfolio shifts, and (ii) the equilibrium in the domestic asset markets, by finding a no-arbitrage 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 United States. We also find that the resulting long-run equity risk premium comoves counter-cyclically with quarterly real GDP growth in both economies. JEL Classification: E31, E41, E51, E52, F40

Keywords: Asset Prices; money demand (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-eec
Note: 185689
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121435

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