The relationship between money and prices revisited

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Virginia Polytechnic Institute and State University

This paper points out three weaknesses in the finding of no relationship between money and prices given in a recent paper by Edgar Feige and Douglas Pearce [Journal of Political Economy, 84 No. 3 (June 1976), 499-522.]

The weaknesses are:

  1. The method they used cannot detect certain relationships between variables,

  2. They have not held constant other factors that could affect prices, and

  3. The relationship they tested does not correspond to an economic theory suggesting that money affects prices.

The theoretical link between money and prices is discussed and a relationship consistent with the theory is tested. It is found that when the effects of output, capacity utilization, and unit labor costs are taken into account, the growth rate of money has a significant positive impact on the growth rate of the wholesale price index.