Working Paper: NBER ID: w0549
Authors: Anthony Cassese; James R. Lothian
Abstract: This paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries. In the analysis we highlight the two polar cases of completely closed and open economies and draw some implications for timing between monetary expansion and inflation, inter-country comparisons of inflation rates and interest rates, and comparisons of central bank behavior. The Granger-causality test is applied in a bivariate fashion to these groups of variables. The main empirical results of our analysis are: (1) Domestic monetary expansion appears to lead inflation in the sense that money Granger-causes prices without feedback, contradicting an implication of the monetary approach to the balance of payments. (2) Hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period, providing no evidence for a generalized "law of one price." (3) Some sterilization of official reserve inflows was successfully performed by the non-reserve central banks, except for Canada. (4) U.S. interest rates Granger-cause foreign rates, providing evidence of some international transmission via asset markets.
Keywords: Inflation; Monetary Policy; International Economics
JEL Codes: E31; E42; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic monetary expansion (E59) | Inflation (E31) |
| Lack of significant timing relationship between domestic and foreign inflation rates (F49) | Domestic inflation does not respond to foreign inflation (E31) |
| U.S. interest rates (E43) | Foreign interest rates (E43) |