Abstract

Monetarists have long advocated that money is a central variable to the explanation of price inflation. Across a group of major industrial countries, the evidence does not provide a clear support for the monetarists' claims. A change in the nominal interest rate significantly determines price change in the short run, and the effect may be prolonged over time. Further, the relationship between the interest rate and price appears independent of the stance of monetary policy, expansionary or contractionary. Subsequently, changes in the interest rate in response to nonmonetary factors are important determinants of price change in many countries.

Author Keywords: Nominal interest rate; Monetary hypothesis of inflation; Price variable lag

E4; E3; E5