Money and prices: evidence from the G7 countries

This paper examines the exogeneity of money and prices within a money demand vector error-correction model. The exogeneity of the variables is central to several ‘buffer stock’ models. However, the paper makes two modifications to the traditional approach. The first is to explicitly acknowledge the importance of the supply of money function by including the function alongside its demand counterpart. The second is to estimate the behaviour of the nominal sector and real sector simultaneously. Overall, the results from the G7 countries suggest that the concerns raised by ‘buffer stock’ models are relevant.