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- Title
Quantity theory is alive: the role of international portfolio shifts.
- Authors
Santis, Roberto
- 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.
- Subjects
QUANTITY theory of money; MONEY market; MARKET volatility; PRICE inflation; GROSS domestic product; ECONOMIC equilibrium
- Publication
Empirical Economics, 2015, Vol 49, Issue 4, p1401
- ISSN
0377-7332
- Publication type
Article
- DOI
10.1007/s00181-014-0912-9