The Dynamics of Money Demand and Prices

International Monetary Fund

No 1990/075, IMF Working Papers from International Monetary Fund

Abstract: The paper evaluates whether a monetary aggregate can serve as a useful predictor of inflation, using recent developments in the principle of cointegrated variables. M2 but not M1 is cointegrated with relevant price, transactions, and rate of return variables. However, deviations of M2 from its long-run equilibrium value do not significantly enhance inflation forecasts based on conventional output-gap models, a result that stands in contrast to the Federal Reserve’s P* relationship. Nevertheless, changes in M2 do contain information about future inflation, consistent with the view that the demand for money reflects the forward-looking behavior of private agents.

Keywords: WP; rate of return; price level; price level variable; inflation equation; money demand theory; output gap; inflation process; time series; Demand for money; Monetary aggregates; Inflation; Output gap; Money markets (search for similar items in EconPapers)
Pages: 50
Date: 1990-01-01
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Citations: View citations in EconPapers (3)

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