This note examines whether long-term nominal interest rates are cointegrated with budget deficits over the period 1959 to 1990. A key finding of this note is that long-term rates are cointegrated with deficits if a one-year ahead inflation forecast series is used to measure long-term expected...

The main implication of the Quantity Theory of Money is that long-run movements in the price level are determined primarily by long-run movements in the excess of money over real output. This implication is related to the concept of cointegration discussed in Granger (1986), which states...

A central proposition in the Phillips curve view of the inflation process is that prices are marked up over productivity-adjusted labor costs. If that is true, then long-run movements in prices and labor costs must be correlated. If long-run movements in a time series are modeled as a stochastic...

Hall and Nobel (1987) use the Granger-causality test to show that volatility influences velocity, leading them to conclude that the recent decline in the velocity of Ml is due to increased volatility of money growth which is alleged to be caused by the Federal Reserve's new operating procedures....

The main objective of this note is to examine whether the interest elasticity of money demand has increased during the last few years. A simple money demand regression that includes additional intercept and slope dummy variables defined over the interval 1981.01 to 1985.03 is estimated for the...

Two popular inflation indicators commonly monitored by analysts are the pace of real economic activity and the rate of growth of labor costs. It is widely believed that if the economy grows at a rate above its long-run potential or, if the rate of growth of labor costs exceeds the trend rate in...

What determines inflation? Several theoretical models of the inflation process have been advanced in the literature, and these models typically yield different predictions about the role of certain variables in determining prices. To illustrate, consider, for example, the expectations-augmented...

Some analysts contend that the introduction nationwide since 1981 of interest-bearing NOWs and Super NOW's has raised the interest elasticity of M1 demand. This article presents empirical evidence consistent with this view. The demand deposit component of Ml does not exhibit any heightened...

Recent years have witnessed very high and volatile interest rates. This has stirred a debate among analysts as to whether observed interest rates are high by historical standards. Some analysts, focusing on the before-tax real rate, argue that if the observed nominal interest rate is corrected...

Market participants recognize two opposing effects of money supply growth on interest rates: a temporary liquidity effect and a permanent expectations effect. That the latter dominates in the long run is clear — a sustained increase in money growth causes proportionally higher interest rates...