quantitytheory

quantitytheory - Quantity Theory II Quantity Theory II...

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Unformatted text preview: Quantity Theory II Quantity Theory II Graduate Macroeconomics I ECON 309 -- S. Cunningham 2 The Purpose of the Fed The Purpose of the Fed McCandless and Weber (1995) write: The Federal Reserve System was established in 1913 to provide an elastic currency, discount commercial credit, and supervise the banking system in the United States. Congress changed those purposes somewhat with the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978. In these acts, Congress instructed the Federal Reserve to: maintain long run growth of the monetary and credit aggregates commensurate with the economys long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates (FR Board 1990, p. 6). 3 Time Series Results Time Series Results McCandless and Weber analyze time series for 110 countries over 30 years, using M0, M1, and M2 to find: There is a high (almost unity) correlation between the rate of growth of the money supply and the rate of inflation. This holds across three definitions of money and across the full sample of countries and two subsamples. There is no (long-run) correlation between the growth rates of money and real output. This holds across all definitions of money, but not for a subsample of countries in the Organisation for Economic Cooperation and Development (OECD), where the correlation seems to be positive. There is no correlation between inflation and real output growth. This finding holds across the full sample and both subsamples. 4 Conclusion Conclusion The results seem to support the quantity theory as identifying correctly the long-run relationships between money, prices, and income.between money, prices, and income....
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This note was uploaded on 02/25/2012 for the course CHEM 309 taught by Professor Staff during the Spring '11 term at UConn.

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quantitytheory - Quantity Theory II Quantity Theory II...

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