to float or to fix evidence on the impact of exchange rate regimes on growth we study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post bretton woods period using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables in contrast with previous studies we find that for developing countries less flexible exchange rate regimes are associated with slower growth as well as with greater output volatility for industrial countries regimes do not appear to have any significant impact on growth the results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature

adaptive versus rational expectations and the fisher effect substantial controversy remains over the causes of interest rate fluctuations this controversy frequently focuses on the role of expected inflation the theoretical determinats of the nominal rate are examined usig the is lm as model and it is shown that the augmented fisher equation is sensitive to the expectations generating mechanism the model assumes that the nominal rate ceteris paribuschanges one for one with expected inflation the total impact however may take any value from zero to one the empirical analysis sequentially estimates reduced form equations based on adaptive and rational expectations the results confirm prior findings that nominal rates do not adjust one for one with inflation the results also yield some insight on the applicability of the assumption of rational versus adaptive expectations

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

money growth output growth and inflation a reexamination of the modern quantity theory s linchpin prediction 1 introductionover the years the quantity theory of money has been extended and refined all versions however begin with the well known equation of exchange mv pq where q is the level of national output real gross domestic product gdp p is the general price level v is the velocity of money circulation and m is the quantity of money to convert this equation actually an identity into a theory one of the four variables contained therein must be specified as functionally dependent on the other three monetarists argue that p is the dependent variable sprinkel 1971 specifically they argue that m is determined by the national monetary authority that v is determined by a variety of both secular and cyclical factors 1 that changes in v do not consistently offset changes in m and that q is determined by capital labor and technological advances sprinkel 1971 the monetarist theory of inflation is a long run theory it does not purport to explain short run increases in the general price level hafer and wheelock 2001 monetarists argue that short run inflation stabilization is not feasible and therefore that monetary policy should be confined to inflation concerns over a relatively long horizon 2john moroney 2002 p 399 asserts that in the traditional version of the quantity theory a country s long run inflation rate increases one to one with its money growth rate the modern wrinkle is that inflation is mitigated by real gdp growth emphasis added this assertion is consistent with the famous dictum of milton friedman 1968 p 18 that inflation is always and everywhere a monetary phenomenon produced in the first instance by an unduly rapid growth in the quantity of money emphasis added friedman s assertion is not that an increased money growth rate is the sole cause of inflation in the long run just the most important cause friedman and friedman 1980 an increase in inflation can also be caused by a decrease in the growth rate of q or theoretically even an increase in the growth rate of v as is easily seen by solving the equation of exchange for p and then taking logs and first differences after taking logs and first differences 3 moroney 2002 obtains an estimating equation in which inflation is functionally dependent on the growth rates of the money stock and real gdp formula omitted see article image where y is ln p x is ln m z is ln q and u is a random disturbance term that includes velocity changes is the first difference operator the modern quantity theory s model implied restrictions which are testable predictions are that the intercept is zero the coefficient of the money stock growth rate is plus one and the coefficient of the growth rate of real gdp is minus one arguably this joint hypothesis is the linchpin prediction of the modern quantity theory if the hypothesis is rejected by the data the theory falls using long run 1980 1993 cross section data on 81 countries which he takes from the world bank s world development report 1995 moroney 2002 tests the joint hypothesis 0 0 1 1 2 1 and incorrectly claims that the hypothesis cannot be rejected at even the 0 01 level of significance 4 as will be shown in the next section the joint hypothesis is rejected decisively fortunately however it will also be shown that a modification to moroney s model specification helps to salvage the most substantive part of the modern quantity theory s implied restrictions 2 modification to the quantity theory setupin contrast to the conventional quantity theory setup in which the economy s real activity is determined entirely outside its monetary sector fama 1982 moroney 2002 that is in which no provision is made for the possibility that the monetary authority s actions could have an adverse effect on output5 the present article entertains the possibility that y and z are jointly determined

sluggish price adjustments and the link between money and price the simple quantity theory of money asserts that because the velocity of money and fullemployment output are constants if the money supply doubles the price level must also double 15 this view of the quantity theory of money is also supported by the policy ineffectiveness proposition put forward by lucas 16 sargent and wallace 20 and barro 1 the policy ineffectiveness proposition asserts that real variables like output and unemployment respond only to unanticipated movements in the money supply but do not respond to anticipated money supply associated with the systematic feedback rules one of the premises essential to the validity of this proposition is the perfect flexibility of prices the corollary of the policy ineffectiveness proposition as expounded by gordon 12 in invalidating this propositin is that because output does not respond to anticipated money supply changes and remains at the natural level the price level responds contemporaneously and proportionately to the anticipated changes in the money supply this conclusion is also consistent with barro s hypothesis that perceived movements in the money stock imply equiproportionate contemporaneous movements in the price level 3 565 66 this one to one relationship between the anticipated money supply and the price level has also been shown theoretically by barro 1 and hercowitz 13 it is this conclusion that needs to be tested by accounting for the speed of adjustments of prices the purpose of this study is to explore theoretically and empirically the link between money supply and price levels by incorporating a gradual price adjustment mechanism more specifically this study examines a the one to one relationship between the log of current money stock and the log of the price level purported by barro 3 b effects of unanticipated money growth on the aggregate price and c importance of anticipated money growth in determining the price level given the current money stock and the current and lagged values of the unanticipated money growth the key element of the study is the realization that the economy is comprised of markets with differing degrees of price adjustments numerous cases of price stickiness can be identified in modern economies as enumerated in survey work by blinder 4 also for instance devadoss and choi 6 observe that the u s agricultural program s price fixing policies such as price

is there a role for monetary aggregates in the conduct of monetary policy abstract we examine the potential policy role of monetary aggregates by attempting to use them as effectively as possible in the analysis of empirical relationships we focus on their role as information variables since any more ambitious use such as in a policy rule would presuppose some information content in the aggregates our results show that in the united states since 1979 the monetary aggregates fall considerably short of those requirements and results with german m3 are hardly more favorable we also investigate whether empirical relationships are not reflective of information relationships because of the use of these variables in countercyclical policy the results are not consistent with that interpretation

subsidies for intracity and intercity commuting this paper analyzes subsidies for intracity and intercity commuting in an urban economics framework with two cities and agglomeration externalities where workers may commute within and between cities first commuting subsidies serve to internalize agglomeration externalities intracity commuting subsidies give incentives to move to the larger city and intercity commuting subsidies make residents of the periphery commute to the core second if agglomeration rents are locally captured commuting subsidies act as a welfare enhancing transfer from the core to the periphery

is inflation always and everywhere a monetary phenomenon using a sample of about 160 countries over the last 30 years we test for the quantity theory relationship between money and inflation when analysing the full sample of countries we find a strong positive relation between long run inflation and the money growth rate the relation is not proportional however the strong link between inflation and money growth is almost wholly due to the presence of high or hyper inflation countries in the sample the relationship between inflation and money growth for low inflation countries on average less than 10 per annum over the last 30 years is weak

why is inflation low when productivity growth is high i introduction in the united states since world war ii inflation has been low when productivity growth has been high for example the 1950s and 1960s were a period of low inflation and high productivity growth whereas the 1970s and 1980s were a period of high inflation and low productivity growth the negative correlation between inflation and productivity growth over the years 1949 2000 is much stronger than the correlation between inflation and unemployment i e phillips curve type correlations or the correlation between inflation and growth in monetary aggregates i e quantity theory correlations little research has explored the comovement between inflation and productivity growth the evidence developed herein suggests that the negative correlation reflects the behavior of the federal reserve over the postwar period the federal reserve has not adjusted nominal income growth through changes in the growth of the money supply to changes in trend productivity growth as will be documented such a policy induces a negative correlation between trend productivity growth and inflation as an acceleration in trend productivity growth in the face of constant nominal income growth leads to a deceleration in inflation this focus on monetary policy as the key factor behind medium to long run correlations between inflation and productivity seems more plausible than a focus on peculiarities of phillips curve reduced form relationships because such relationships are plausibly more appropriate guides to the short run dynamics of inflation as a case in point consider the recent shift to inflation targeting monetary policy strategies in the united kingdom and sweden which emphasize the key role that monetary policy plays in the inflation outlook over several years the role of monetary policy in generating the strong correlation between productivity growth and inflation in the medium run is developed in a textbook model based on an expectations augmented phillips curve the model s main empirical predictions are confirmed 1 inflation especially expected inflation should fall when trend productivity growth rises and 2 nominal income and nominal wage growth should not change when trend productivity growth changes the model also implies that productivity growth enters a reduced form phillips curve relationship as a proxy for inflation expectations this implies that traditional estimates of the nonaccelerating inflation rates of unemployment nairu should fall when productivity growth accelerates an empirical regularity that has received a great deal of academic and policy attention in recent years and is typically explained via some type of irrationality perhaps surprisingly these empirically regularities do not rely on the great inflation of 1965 79 when inflation accelerated and productivity growth decelerated recent discussions of phillips curve reduced form relationships have placed a strong emphasis on structural explanations that may explain a link between productivity growth the nairu and hence inflation staiger et al 2001 present evidence that the time series techniques they employ to estimate trend productivity growth and the nairu yield a strong correlation between the nairu and trend productivity growth ball and moffitt 2001 and ball and mankiw 2002 provide a structural interpretation labor market institutions for some reason perhaps irrationality make the real wage aspirations of workers respond very sluggishly with a lag of perhaps 10 years or more to productivity growth and hence an acceleration in productivity growth leads to a prolonged period of downward pressure on labor costs and hence inflation similar reasoning has been used in policy circles for years at the council of economic advisors 1997 2000 and the federal reserve board meyer 2000 reflecting the reasoning in grub b et al 1982 and braun 1984 the focus herein the behavior of policy is consistent with the evidence on inflation productivity growth and empirical estimates of the nairu

the demand for money a structural econometric investigation this study empirically investigates dynamic microfoundations for the conventional static money demand equation an intertemporal substitution model with the addilog utility function yields a money demand relationship that closely approximates the double log specification results from previous empirical studies largely support the derived equation estimations with quarterly u s data support cointegration among real per capita m1 and consumption and an after tax long term interest rate for the post 1980 period estimated short run intertemporal interest rate elasticities of consumption vary from 0 26 to 0 93 estimated long run elasticities of substitution between consumption and money range from 0 26 to 0 41

dissecting fiscal multipliers under the fiscal theory of the price level abstract we derive analytical expressions for fiscal multipliers on output and inflation under the fiscal theory of the price level in the associated fiscal regime taxation multipliers turn positive while the government spending multiplier has the same functional form as its counterpart in the monetary regime augmented by a nominal wealth effect as a result fiscal multipliers tend to be larger in the fiscal regime with the degree of price stickiness being a key determinant of their exact sizes in particular multipliers go to infinity as prices become fully fixed and collapse to their equivalents in the monetary regime as prices become fully flexible standard calibrations suggest that the fiscal regime hosts a government spending multiplier on output that lies between 1 and 3 we also analyze the effectiveness of money financed fiscal stimulus in the fiscal regime money financed stimulus is equivalent to a particular form of debt financed stimulus the effectiveness of money financed stimulus in raising output relative to inflation decreases as monetary policy becomes more responsive to inflation

deflation and depression is there an empirical link are deflation and depression empirically linked no concludes a broad historical study of inflation and real output growth rates deflation and depression do seem to have been linked during the 1930s but in the rest of the data for 17 countries and more than 100 years there is virtually no evidence of such a link

monetary policy with interest on reserves abstract i analyze monetary policy with interest on reserves and a large balance sheet i show that conventional theories do not determine inflation in this regime so i base the analysis on the fiscal theory of the price level i find that monetary policy can peg the nominal rate and determine expected inflation with sticky prices monetary policy can also affect real interest rates and output though higher interest rates raise output and then inflation the conventional sign requires a coordinated fiscal monetary policy contraction i show how conventional new keynesian models also imply strong monetary fiscal policy coordination to obtain the usual signs i address theoretical controversies a concluding section places our current regime in a broader historical context and opines on how optimal fiscal and monetary policy will evolve in the new regime

the behavior of money and other economic variables two natural experiments abstract the object of this paper is to test the performance of the quantity theory model and the related proposition of monetary neutrality in a context in which to use bernanke s phraseology money move d for reasons that were plausibly unrelated to the current state of the economy we investigate this question using data from two recent episodes of monetary policy regime change the move to floating exchange rates throughout the industrialized world following the breakdown of bretton woods in the early 1970s and the shift toward less expansive monetary policy that to varying degrees took place in these countries a decade or so later the results of this exercise are highly positive the money price relationship that we observe is fully consistent with theory growth shifts in the nominal stock of money and in the price level are highly correlated and bear a one to one relation to one another growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money the classical neutrality proposition in this context superneutrality in general receives strong though not totally unambiguous support

evolving monetary fiscal policy mix in the united states a micro founded model that allows for changes in the monetary fiscal policy mix and in the volatility of structural shocks is fit to us post wwii data agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion of the macroeconomy the results show that the 60s and the 70s were characterized by a prolonged period of active fiscal policy and passive monetary policy the appointment of volcker marked a change in the conduct of monetary policy but it took almost ten years for the fiscal authority to start accommodating this regime change

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

intrametropolitan variation in wage rates the case of atlanta fast food restaurant workers this paper utilizes a unique data base to provide some rare evidence on wage variation within a metropolitan area positively sloped wage gradients are found for both black and white employees of fast food restaurants in atlanta georgia blacks are found to work on that portion of the gradient where wage rates are lowest evidence on discrimination suggests that consumer prejudice affects the wages paid to black workers as distance from the central business district center increases the positive wage gradient effect is found to strongly dominate the negative effect on wages from greater consumer discrimination copyright 1994 by mit press

some international evidence on the quantity theory of money this paper develops a two equation model of money interest rates and inflation based on the simple quantity theory an d fisher s hypothesis about nominal interest rates the model has both within equation and cross equation restrictions that are tested on long run average cross country data covering the period 1962 88 the major finding is that the restrictions cannot be easily rejected and this suggests that the behavior of interest rates and inflation in a major part of the postwar period can be understood in terms of classical monetary forces copyright 1993 by ohio state university press

time aggregation and the relationship between inflation and money growth using panel data for 99 countries we confirm that the measured elasticity of prices with respect to money is higher and closer to unity the higher is money growth and the longer the time horizon over which the data are averaged we propose two explanations in one the true model of inflation involves a lagged response to money growth in the other there is negative correlation between shocks to inflation and money growth our empirical results can be explained if high money growth countries have i shorter lags or ii less negative correlation when compared to countries with low money growth

a nominal theory of the nominal rate of interest and the price level this paper develops a simple theory of nominal income and interest determination under the assumption that the only relevant distinction between money and bonds lies in their holding periods individuals take full account of the government budget constraint and do not concern themselves with discounting future tax liabilities associated with the issue of government bonds according to this theory the price of bonds is analogous to the price level and the nominal rate of interest is determined by the bond money ratio and bears no close relationship to the rate of expansion of the price level

the success of the fed and the death of monetarism i introduction there has been a significant reduction in the macroeonomic volatility in the u s economy during the last 20 yrs the standard deviation of the central bank s target variables like inflation and nominal gross domestic product gdp declined substantially however at the same time the standard deviation of monetary aggregates has increased 1 this unique macroeconomic phenomenon is also associated with the disappearance of correlation between inflation and money growth this is in contrast to the monetarist argument that suggests that an important cause of economic instability is excess variation in the growth rate of money the most famous monetarist prescription for monetary policy is milton friedman s proposal that the growth rate of money should be constant there is however no evidence of falling variations in the growth rate of money over the last 20 yrs in fact the standard deviation of the rate of growth of monetary base has increased from 1 63 during 1960 1982 to 3 1 during 1983 2003 milton friedman in an interview with taylor 2001 pointed out that there was a breakdown in the relationship between money and gdp after 1980 which came along with a dramatic reduction in the variability of growth rate of gdp friedman says i am puzzled about is whether and if so how they suddenly learned how to regulate the economy does alan greenspan have an insight into the movements in the economy and other shocks that the people don t have friedman further says it looks as if somehow in 1991 1992 they were able to install a good thermostat instead of a bad one is alan greenspan a good thermostat compared to other fed chairmen taylor 2001 there is widespread consensus on the effect of monetary policy on inflation in the long run however there is no consensus on how monetary policy affects real output in the short run there is now a consensus among economists that the original monetarist proposition that there is no long run trade off between inflation and unemployment is correct monetarism can also be viewed as the platform from which the rational expectation revolution took off however the monetarist proposition that economic fluctuation is caused by excessively variable monetary growth has largely been abandoned authors like estrella and mishkin 1997 and feldstein and stock 1994 find that monetary aggregates do not have a significant informational content after 1979 and hence cannot be used as an information variable for the stance of monetary policy their finding is also consistent with dwyer 2002 and dwyer and hafer 1999 who find that there is little correlation of inflation and money growth across countries on quarterly and annual bases after 1979 the literature finds significant correlation e g lucas 1980 between money growth and inflation in the pre 1979 period but this correlation has disappeared after 1979 see table 1 and figures 1 4 if stabilization policy makes inflation a constant then there will be no correlation between inflation and policy as no variable is correlated with a constant according to kochin 1973 if the monetary authority is able to stabilize the economy by optimally setting the variability of the control variables e g monetary aggregates and interest rate then there will be no correlation between the goal variable e g inflation and nominal gdp and the control variable even if the policy is not perfect if the policy is too variable and even if it is well timed then a countercyclical policy adopted by the central bank might lead to greater variability in the goal variable as argued by friedman 1953 poole 1993 1994 and tanner 1993 also argue that one predictable consequence of optimal monetary policy is that the correlation between monetary policy instruments and policy goals will be driven to zero poole further contends that it is obvious to any careful reader of theil 1964 that optimally variable policy will give rise to a zero correlation between policy and goal variable

an international comparison of prices and exchange rates a new test of purchasing power parity abstract this paper introduces a new approach based on divisia index numbers to test ppp with both short run and long run data for all major currencies simultaneously the short run results indicate that the predictions of ppp do not hold up at all well on the other hand however the long run data are quite consistent with the ppp hypothesis the results also identify five years as a broad measure of the length of the long run insolar as ppp is concerned

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

on some predictions of the quantity theory of money recently efforts have been made to test some of the long term propositions implied by the quantity theory of money of these two of the more interesting studies are those of lucas 11 and lothian 10 lucas using time series data for the united states and applying fourier transforms detrends the series and then using scatter diagrams of these detrended series finds considerable support for the proposition of one to one correspondence between rate of growth of money and the rate of inflation and for the fisher hypothesis lothian 10 following upon a suggestion of lucas 11 uses cross country averages of time series data for twenty o e c d countries to test the classical neutrality hypothesis the monetary approach to the exchange rate determination and the fisher hypothesis his approach consists of treating the cross country averages to represent longterm steady state points and once again uses scatter diagrams of the appropriate variables he reports complete support for the first two hypotheses and partial support for the fisher hypothesis the aim of this paper is to reexamine two of the propositions implied by the quantity theory of money namely the neutrality hypothesis and the fisher hypothesis for six developed countries by using a methodology recently proposed by wickens and breusch 12 which is an elaboration of an earlier work by bewley 2 their methodology starts with the well known autoregressive distributed lag model which can be estimated to extract long term parameters of interest wickens and breusch s point of departure is that unlike this traditional procedure this model can be transformed in such a way that direct estimates of the long term parameters along with their standard errors can be obtained provided the model is estimated appropriately as explained below clearly this methodology is then ideally suited for application to the issue under consideration the outline of the paper is as follows the hypotheses and the models are explained in section ii the estimation issues are discussed in section iii the results are presented in section iv the paper concludes with a brief summary of the main findings

the demand for m1 in the u s a 1960 1988 estimated u s m1 demand functions appear unstable regularly breaking down over 1960 1988 e g missing money great velocity decline m1 explosion we propose a money demand function whose arguments include inflation real income long term bond yield and risk t bill interest rates and learning curve weighted yields on newly introduced instruments in m1 and non transactions m2 the model is estimated in dynamic error correction form it is constant and with an equation standard error of 0 4 variance dominates most previous models estimating alternative specifications explains earlier breakdowns showing the model s distinctive features to be important in accounting for the data

indeterminacy bubbles and the fiscal theory of price level determination abstract the recently developed fiscal theory of price level determination contends that there is an important class of policy rules in which there exists a unique rational expectations solution that shows the price level to be dependent upon fiscal policy and independent of monetary variables the present paper argues however that there is an alternative solution to these models that has entirely traditional or monetarist properties this latter solution is arguably more plausible since it is the solution that is typically regarded as the bubble free fundamentals solution the paper s analysis involves the specification of feasible instrument variables

the augmented solow model and the productivity slowdown abstract in an insightful and influential paper mankiw et al 1992 quarterly journal of economics 107 407 437 have suggested that an augmented solow growth model can account for 80 of the variation in output per capita across countries due to different steady state growth paths that result from differences in saving rates education and population growth this paper carries their analysis one step further and asks whether changes in the growth rate between the 1960s and the 1980s can also be explained by this framework our results provide further support for several of mankiw et al s key conclusions investment in physical capital population growth and the initial levels of output seem to matter a great deal however investment in human capital has no ability to account for changes in growth rates over time we conclude that investment in physical capital seems to be quite important for economic growth though the reasons for this importance may not be fully captured by the augmented solow growth model

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

money as stock abstract the fiscal theory determines the price level from the value of nominal government debt as a claim to government primary surpluses just as private stock is valued as a claim to corporate profits valuation equations are not constraints so this theory does not mistreat the government s intertemporal budget constraint i anchor the analysis in a simple cash in advance model when money demand falls to zero i show that the price level can still be determined by the government debt valuation equation

moderate inflation and the deflation depression link in a recent paper atkeson and kehoe 2004 demonstrated the lack of a robust empirical relationship between inflation and growth for a cross section of countries with 19 th and 20 th century data concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth in this paper we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels in particular we allow for the possibility that high inflation is negatively correlated with growth while a positive relationship exists over the range of negative to moderate inflation our results confirm a positive relationship between inflation and growth at moderate inflation levels and support the contention that the relationship between inflation and growth is non linear over the entire sample range

a model of commodity money abstract commodity money is modeled as one or two of the capital goods in a one consumption good and one or two capital good overlapping generations model among the topics addressed using versions of the model are i the nature of the inefficiency of commodity money ii the validity of quantity theory predictions for commodity money systems iii the circumstances under which one commodity emerges naturally as the commodity money iv the role of inside money money backed by private debt in commodity money systems and v the circumstances under which a government can choose the commodity to serve as the commodity money

fiscal policy in an unemployment crisis this paper shows that large scal multipliers arise naturally from equilibrium unemployment dynamics in response to a shock that brings the economy into a liquidity trap an expansion in government spending increases output and causes a fall in the unemployment rate since movements in unemployment are persistent the eects of current spending linger into the future leading to an enduring rise in income as an enduring rise in income boosts private demand even a temporary increase in government spending sets in motion a virtuous employment spending spiral with a large associated multiplier this transmission mechanism contrasts with the conventional view in which scal policy may be ecacious only under a prolonged and committed rise in government spending which engineers a spiral of increasing ination

interest rates and inflationary expectations abstract the relationship between inflation and the rate of interest for the united states is examined within a dynamic specification framework which yields direct estimates of the long run as distinct from the short run coefficients the fisher hypothesis as a long run proposition is supported by the data the results are shown to be robust with respect to the choice of the interest rate

the choice among monetary aggregates as targets and guides for monetary policy difficulties in meeting its monetary targets led the federal reserve in october 1979 to adopt a new operating procedure to achieve firmer control over monetary aggregates yet the inflationary environment has fostered financial developments that affect the behavior of the traditional monetary aggregates and that raise questions whether different aggregates may not be better this paper compares the various monetary aggregates for their usefulness as guides for monetary policy in the light of recent financial developments the criterion of usefulness is the ability to influence and predict gnp growth this ability is tested in two ways first by the stability of the velocities of the monetary aggregates and second by the advance information they provide of gnp growth it is presumed that the aggregates with the most stable velocities make the best targets for monetray policy and that those containing the most advance information make the best guides for policy the paper has three main sections the first discusses the criteria for using monetary aggregates as targets and guides the second two sections describe and report tests of the various monetary aggregates as targets and guides a summary of findings is presented as a final section

oil vulnerability in the australian city assessing socioeconomic risks from higher urban fuel prices global oil prices have risen markedly over the past 18 months generating considerable speculation regarding their economic and social impacts cities that are highly dependent on petroleum for urban transport are likely to be most adversely affected by rising oil prices yet there has been little recent scholarly engagement with the socioeconomic implications of increasing oil prices this paper develops a basic framework and methodology for assessing the socioeconomic oil vulnerability of australian cities the paper demonstrates that there is wide spatial variability in the vulnerability of australia s urban populations to rising fuel costs which may compound existing socio spatial divisions and speculates on some underlying causal factors the paper calls for better data and new methods to understand the issue

purchasing power parity and the behavior of prices and nominal exchange rates across exchange rate regimes abstract the evidence presented in this paper shows that purchasing power parity as a long run proposition is indeed a very useful approximation we see this quite clearly in the panel data for three historical periods examined here the classical gold standard era from 1870 to 1914 the interwar period from 1921 to 1939 and the period after world war ii from 1959 to 1998 price level behavior across countries differs in the way that ppp suggests when monetary arrangements differ and is highly similar when monetary arrangements are themselves similar inflation rates adjusted for exchange rate changes in general are highly correlated and bear a one to one relation to one another within and across the three periods and the varied monetary regimes that prevailed

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

equilibrium relationships between money and other economic variables central to the quantity theory of money are a number of important propositions about the long run equilibrium effects of changes in the nominal stock of money on other economic variables a standard way of testing these propositions is to use quarterly or annual data explicitly model the lag structure and then derive the long run solution of the model from the empirical estimates an alternative is to use some type of smoothing procedure to approximate positions of equilibrium and then to use these transformed data directly in testing hypotheses the national bureau technique of averaging data over reference cycle phases is one such method robert lucas s application of fourier transforms in two illustrations of the quantity theory of money 1980 is another and john geweke s method 1982 of frequency decomposition is a third an entirely different way of approaching the problem is to use cross country average rather than time series data as the basic units of observation the advantage according to lucas is that since the two quantity theoretic laws that he examines are obtained as characteristics of steady states or limiting distributions of theoretical models the ideal experiment for testing them would be a comparison of long term average behavior across economies with different monetary policies but similar in other respects p 1006 in this paper i conduct such an experiment the data that i use are for 20 oecd countries over the period 1956 80 the specific relationships that i examine are those between money and the price level money and real income money and interest rates and money and exchange rates in the main the data accord well with the quantity theoretic model classical neutrality holds there is evidence of a fisher effect albeit a less than complete effect on interest rates finally the data are consistent with long run purchasing power parity and hence correspondingly with a long run monetary approach to exchange rate determination

inflation and monetary regimes abstract correlations of inflation with the growth rate of money increase when data are averaged over longer time periods correlations of inflation with the growth of money also are higher when high inflation as well as low inflation countries are included in the analysis we show that serial correlation in the underlying inflation rate ties these two observations together and explains them we present evidence that averaging increases the correlation of inflation and money growth in more when the underlying inflation rate has higher serial correlation

spatial mismatch and costly suburban commutes can commuting subsidies help proponents of the spatial mismatch hypothesis argue that job decentralisation harms low income residents of central cities because of barriers that limit their access to suburban labour markets such barriers can take the form of housing discrimination exclusionary zoning or long and difficult commutes this paper uses an urban equilibrium model of spatial mismatch to analyse the impact of commuting subsidies on the welfare of low income central city households with restricted mobility specifically it seeks to determine how effective such subsidies are at reducing the welfare impact of spatial mismatch while subsidised outward commuting is found to raise the welfare of the low income households the welfare gains are only a small portion of the welfare loss due to spatial mismatch

the output employment and interest rate effects of government consumption abstract we study the impact on aggregate variables of changes in government consumption using the neoclassical stochastic growth model we show theoretically that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary change we also show that in principle there can be an analog to the keynesian multiplier in the neoclassical growth model finally in an empirically plausible version of the model we show that the interest rate impact of a persistent government consumption shock exceeds that of a temporary one our results provide counterexamples to existing claims in the literature

the search for equilibrium relationships in international finance the case of the monetary model abstract this paper considers some of the main long run equilibrium relationships in international finance we supplement the phillips perron test which has a unit root under the null with the new kps test statistic which is based on a stationary null and apply them to the various exchange rate fundamentals the application of the johansen test for multiple cointegrating factors finds evidence of the existence of stable money demand functions in both the usa and uk with relatively short lived perturbations however there appears to be insufficient information in the data to distinguish whether the real exchange rate has a unit root or is persistent and mean reverting the consequent persistent deviations from purchasing power parity appears the only source of rejection of the equilibrium monetary model

testing the long run neutrality of money in a developing economy the case of india abstract seasonal integration and cointegration techniques are used to test the hypothesis of long run money neutrality using indian data on the basis of money real output and price level quarterly data empirical evidence is presented showing that money is cointegrated with prices but not with output at the zero frequency this evidence is interpreted to imply that money affects nominal but not real variables in the long run it is concluded that money is neutral in the long run

money growth output growth and inflation estimation of a modern quantity theory 1 introduction during the years 1980 1993 annual inflation averaged 81 5 in latin america 12 3 in africa but only 6 4 among 16 countries in the oecd within latin america inflation ranged from 8 2 in honduras to 374 3 in argentina and in africa from 0 6 in the republic of the congo to 61 6 in sierra leone what are the reasons for these large differences if cross country differences in inflation can be linked closely to corresponding differences in money growth the reason is clear but if the link is weak then other reasons must be sought several authors have recently rejected money growth as an explanation of inflation there are three lines of criticism the first typified by baba hendry and starr 1992 estrella and mishkin 1997 and cochrane 1998 argues that the income velocity of and thus the demand for monetary aggregates is so unstable that money growth is an unreliable explanation a second criticism closely related to the first is a time series issue if money the price level and output are not cointegrated then there is no stable long run relationship among them some researchers find evidence of cointegration hoffman and rasche 1991 baba hendry and starr 1992 stock and watson 1993 hoffman rasche and tieslau 1995 swanson 1998 carlson et al 2000 dutkowsky and atesoglu 2001 but others do not stock and watson 1989 hafer and jansen 1991 friedman and kuttner 1993 thoma 1994 the cointegration question remains unsettled a third criticism is quite distinct from the first two it argues that in dynamic general equilibrium models with infinitely lived households money in the household utility function and rational expectations there is a class of policy rules with a unique solution that shows that the price level is independent of monetary policy but dependent strictly on fiscal policy this fiscal theory of price level determination breaks any link between money growth and inflation the key fiscalist models were developed by leeper 1991 sims 1994 1996 and woodford 1994 1995 1998 a simple version is summarized succinctly by mccallum 2001 who demonstrates an alternative mathematical solution to a fiscalist model that yields a monetary explanation of the price level but the monetarist foundations are under vigorous attack 1 this paper specifies and estimates a modern version of the quantity theory of money growth real gdp growth and inflation its traditional feature is that a country s long run inflation rate increases with its money growth rate the modern wrinkle is that inflation is mitigated by real gdp growth i assume that real gdp growth is governed by exogenous forces such as growth in human capital physical capital formation and technological progress the model makes no attempt to explain gdp growth rates long run neutrality is presupposed i show that the quantity theory can be written as a regression model whose theoretical implications can easily be tested section 3 this paper then makes three empirical contributions the first is to estimate a long run version of the quantity theory and test its implications statistically sections 5 and 6 the estimates are long run in the important sense that inflation money growth and real gdp growth rates are annual averages computed for 81 countries over the 14 years from 1980 to 1993 short run changes in the series are excluded by design the second is to partition statistically the roles of money and real gdp growth as determinants of inflation section 7 the third is to conduct out of sample forecasts section 8 here we discover how well the model estimated for one group of countries predicts inflation in others this paper differs from previous work in three important ways first earlier research has not been based on theoretically grounded regression models friedman 1956 1968 klein 1956 friedman and friedman 1980 friedman and schwartz 1982 mccandless and weber 1995 rolnick and weber 1997

international transmission of us macroeconomic policy and the inflation record of western europe abstract the interaction between monetary policy government budget deficits and inflation is examined for the four largest western european economies comprising france italy the united kingdom and west germany in order to assess the possible impact of us macroeconomic policy past us monetary base growth deficits and inflation rates are included in the set of explanatory variables for each of the european countries empirical results for the 1962 2 1985 4 sample period reveal interplay between domestic monetary and fiscal policy to be augmented by a significant impact of the us variables across all four countries in the sample

some colonial evidence on two theories of money maryland and the carolinas recent developments in monetary economics stress the nature of monetary injections emphasizing that they have implications for the relationship between money and prices in contrast traditional approaches posit stable money demand functions that are independent of how money is injected the former approach implies that certain proportionality relations between money and prices need not obtain this permits the two approaches to be empirically distinguished but only if an appropriate experiment is conducted the colonial period is one such experiment colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply

do we need a distinct monetary constitution abstract elements of the chicago and virginia traditions of political economy have rejected both competitive money production and money s politicization via post constitutional bargaining opting instead for constitutionalization this paper argues that competitive money production is not subject to the pro cyclicality that concerns constitutional political economy it also meets the standard of predictability that motivates constitutional perspectives although at the level of individual prices rather than the price level an effective monetary constitution is implicit in any constitution that protects rights to property contract and exchange and sets limits on the democratic process

money output and inflation in the longer term major industrial countries 1880 2001 i introduction the empirical role of money growth in the macroeconomy has been studied by many researchers using different data and methods the most prominent studies focusing on the quantity theory of money are those of friedman and schwartz 1963 1982 using data averaged over the phases of the business cycle in order to capture longer run movements with u s and u k data back to 1867 the study by mccandless and weber 2001 is a representative example for a different approach for 110 countries in the post wwii period longer run growth rates are approximated by growth of a variable over a 30 year period average growth rates 1 the problem with phase averaging is that it does not deal with possible nonstationarity of the data 2 the problem with growth averages over long periods while informative to a degree is that they have limitations too it is impossible to assess the timing of movements in these variables 3 in the frequency domain the long run is associated with frequency zero which in our terminology is the long run trend previous studies in the frequency domain on the long run neutrality of money at zero frequency include the studies of lucas 1980 and geweke 1986 the theory of spectral analysis provides a rigorous framework for extracting specific frequency bands from the data instead of considering only frequency zero stock and watson 1998 applied the band pass filter of baxter and king 1999 to extract cycles frequency bands for u s data and focused on the business cycle and on mostly the post wwii period christiano and fitzgerald 2003 proposed an improved band pass filter and provided an application to the longer run relation of money and inflation for bands of 8 20 years and 20 40 years in the united states from 1900 to 1997 4 the usefulness of monetary aggregates for conducting monetary policy has been seriously called into question because of the instability of money demand a prominent empirical study is that of estrella and mishkin 1997 recent mainstream new keynesian models have no explicit role for money woodford 2008 a contrasting view is that the longer term role of money is still of relevance for monetary policy the european central bank explicitly emphasizes a supporting role that monetary aggregates should play in order to provide an anchor for inflation expectations hafer haslag and jones 2007 issing 2006 king 2002 nelson 2003 christiano motto and rostagno 2007 provided a theoretical new keynesian model where inflation expectations lose their anchor unless money is monitored and reacted to also beck and wieland 2008 presented a new keynesian model where cross checking with money growth movements improves inflation control similarly assenmacher wesche and gerlach 2006 2007 found a significant role for a low frequency low pass filtered component of money in the empirical new keynesian phillips curve equation 5 in the spirit of friedman 1961 we use long time spans so that our results are unlikely to be because of a specific policy rule in place in a given period we have 122 years of annual data from 1880 to 2001 before the introduction of the euro in 2002 we have real gross domestic product gdp money and consumer price indices cpis with no gaps for 11 industrialized countries 6 the countries included in our study differ in such terms as their institutions fiscal and monetary policies and economic growth rates nonetheless at least in peace time they were similar in generally having comparatively free markets in which prices and interest rates were determined our aim is to apply analytic methods that are free from economic and statistical models as much as possible in order to explore empirical regularities or stylized facts in the data also the focus of our research is the longer run we employ band pass filters to pick out cycles from each time series that last 8 40 years that is the longer term component

money and output viewed through a rolling window abstract we examine the extent to which fluctuations in the money stock anticipate or granger cause fluctuations in real output using a variety of rolling window and increasing window estimation techniques various models are considered using simple sum as well as divisia measures of m 1 and m 2 income prices and both the t bill rate and the commercial paper rate findings indicate that the relation between income money prices and interest rates is stable as long as sufficient data are used and that there is cointegration among the variables considered although cointegration spaces become very difficult to estimate precisely when smaller windows of data are used further both m 1 and m 2 are shown to be important predictors of income for the entire period from 1960 2 1996 3 based on modified versions of what we term the most damaging specifications from friedman and kuttner 1993 and thoma 1994 our new evidence is based in part on a rather novel model selection approach to examining the relationship between money and income 1998 elsevier science b v all rights reserved

improving inflation prediction with the quantity theory this paper focuses on the role of the quantity theory in improving inflation forecasts we find that the cointegration based quantity theory does not hold for the period after 1995 for the u s data however that period is well explained by an adaptive quantity theory based on a functional coefficient cointegration that adapts to the unemployment rate the forecasting exercises show that the adaptive quantity theory has superior predictive power for targeting future inflation

multi country evidence on the behavior of purchasing power parity under the current float abstract using panel data for the united states and 22 other oecd countries for the current float this paper presents evidence that despite substantial short term perturbations purchasing power parity actually performed much better than commonly believed average rates of growth of real exchange rates over long horizons bear little relationship either to average rates of growth of nominal exchange rates or to average inflation differentials thus implying a close to one to one relation between average rates of growth of nominal exchange rates and average inflation differentials panel data variants of standard unit root tests suggest that the real exchange rates of these countries can be characterized as mean reverting

the fisher hypothesis a multi country analysis this paper tests whether the fisher hypothesis holds for a sample of 26 countries by assessing the long run relationship between nominal interest rates and inflation rates taking into consideration the short run dynamics of interest rates the empirical evidence supports the hypothesis that there is a one to one relationship between the interest rate and inflation for more than half of the countries under study

monetary facts revisited abstract this paper uses data from 46 economies over the post war period to revisit two key monetary facts i the link between money growth and inflation and ii the link between credit growth and financial crises the analysis reveals that the former has weakened over time while the latter has become stronger this suggests that there is an inverse relationship between the two monetary facts the money inflation link is weak and the credit crisis nexus is strong when inflation is low and financial systems are liberalised while the reverse holds true in environments of high inflation and less liberalised financial systems

results of a study of the stability of cointegrating relations comprised of broad monetary aggregates abstract we find strong evidence of a stable money demand relationship for mzm and m2m through the 1990s though the m2 relation breaks down somewhere around 1990 evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in m2 velocity which began around 1990 and was largely over by 1994 taken together our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds although this reallocation may have been induced by depository restructuring we argue that the substitution could be explained by appropriately measured opportunity cost

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

the stability of long run money demand in five industrial countries abstract this study provides strong evidence for the stability of long run demand functions for narrowly defined money m1 in five industrial countries u s japan canada u k and west germany using post war quarterly data evidence of stability is examined using two different estimation techniques and through a formal test of parameter constancy designed specifically for cointegrating vectors in the majority of these countries the key to stability is the imposition of a unitary long run income elasticity that is rarely rejected by the data

the mechanisms of spatial mismatch the spatial mismatch hypothesis smh argues that low skilled minorities residing in us inner cities experience poor labour market outcomes because they are disconnected from suburban job opportunities this assumption gave rise to an abundant empirical literature which is rather supportive of the smh surprisingly it is only recently that theoretical models have emerged which probably explains why the mechanisms of spatial mismatch have long remained unclear and not properly tested this article presents relevant facts reviews the theoretical models of spatial mismatch confronts their predictions with available empirical results and indicates which mechanisms deserve further empirical tests

real dollar exchange rate under the bretton woods and floating exchange rate regimes abstract the focus of the paper is on real exchange rates for the dollar over the period 1957 to 1985 most such exchange rates followed an almost steplike pattern showing relatively little movement in the late 1950s and 1960s falling abruptly and then remaining low in the 1970s and finally in the 1980s rising back to levels close to those that prevailed initially contrary to much recent commentary therefore the period that appears different is not the last five years but the decade that preceded them an important factor underlying this pattern of exchange rate movement according to results presented in the paper was the behavior of monetary policy and hence inflation in the united states what remains to be established is the precise mechanism linking money and real exchange rates and the relative strength of those links

inflation dynamics the role of public debt and policy regimes abstract in a passive monetary and active fiscal policy regime changes in the value of public debt generate wealth effects on households then in contrast to the active monetary and passive fiscal policy regime inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks moreover a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks in a passive monetary and passive fiscal policy regime both monetary and fiscal policy parameters affect inflation

private versus public schools in post apartheid south african cities theory and policy implications blacks and whites have different incomes decide where to locate in the city and which school to send their children to we show that despite the tuition fees imposed by whites and their remote location some black pupils attend the private school this market solution is shown not to be optimal because whites overprice education in order to limit black attendance at the private school three types of education policies are then considered transportation subsidies private school vouchers and public school spending the efficiency of such policies depends on the fee setting behavior of whites that strongly varies from one policy to another

money inflation and output under fiat and commodity standards we examine the behavior of money inflation and output under fiat and commodity standards to better understand how changes in monetary policy affect economic activity using long term historical data for 15 countries we find that under fiat standards the growth rates of various monetary aggregates are more highly correlated with inflation and with each other than under commodity standards money growth inflation and output growth are also higher in contrast we do not find that money growth is more highly correlated with output growth under one standard than under the other

international price behavior and the demand for money oil prices commodity prices and american monetary policy the last operating through a variety of channels have all figured prominently in explanations of the international inflation process in the late 1960s and early 70s out major purpose in this paper is to test these various hypotheses we do so in the context of a reduced form rational expectations price equation which we estimate for the united states and seven other industrial countries using quarterly data for the period 1955 through 1976 the principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process the factors that produced these monetary changes however differed among countries price shocks of various sorts were clearly of secondary importance the other important set of conclusions concerns the demand for money in place of a traditional stock adjustment model we used gls with a second order correction for autocorrelation we believe this produced more plausible estimates of the parameters of the long run demand function and of the adjustment process itself

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

monetary policy and the twin crises abstract after presenting a brief overview of the recent financial crisis and the european debt crisis that followed in its wake this paper goes on discuss monetary policy in the united states the united kingdom and the euro bloc prior to and during the course of the two crises the paper presents historical evidence for the three areas on the relationships linking the volatilities of output inflation and monetary growth in all three these relations are strongly positive there is therefore no tradeoff between inflation and output volatility the two move up and down together both moreover move up and down with the volatility of monetary growth viewed from this perspective the increased volatilities of money supplies and the monetary base in the united states the united kingdom and the euro bloc over the last half decade pose problems

money and monetary stability in europe 1300 1914 abstract this paper investigates the determinants of monetary stability in europe from the late medieval era until world war i through this period the anchor for monetary policy was the silver or gold value of the monetary unit states however frequently abandoned this anchor some depreciating their monetary units against silver and gold less than 10 fold and others more than 10 000 fold between 1500 and 1914 to understand the determinants of these differences we compile a new and comprehensive monetary history dataset for all major states in europe and test alternative theories we find strong evidence that political factors and in particular fiscal capacity political regime and warfare explain patterns of monetary stability this finding is robust to addressing endogeneity controlling for the instability induced by the mechanics of the monetary system and accounting for the impacts of new monetary technologies and the advent of fiat standard

interaction between central bank behaviour and fiscal policy the us case federal reserve behaviour is analysed using a model which incorporates an effect an effect of iscal pressure on monetary policy formulation incentive structures are hypothesized to be such that the central bank plans over a longer horizan than that relevant to the administration with the cyclically adjusted deficit proxying for fiscal pressure from the administration the response to the deficit then plays an interactive role in affecting the trade off weights applied to the competing goals of monetary policy the model performs well for the usa and provides a pattern of policy that is stable over the full 1961ndash 83 period

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

i discovered the peso problem irving fisher and the uip puzzle abstract irving fisher was the first economist to posit what has come to be known as uncovered interest parity relation he was also the first to offer a peso problem type explanation for important episodes in which it was violated after reviewing his theoretical and empirical work on this subject we go on to reexamine both his data and several other bodies two consisting of multi country panel data and a third consisting of a two century long time series for the united states and the united kingdom we find evidence in these data of the important role played by episodic phenomena in disturbing the uip relation like fisher we find that the influence of such phenomena dissipates over time over the long term these errors prove to be less important and uip receives empirical support