Re: Reply to B. Mitchell, P. Davidson

[ACSLKS@xxxxxxxxxxxxxxxx id <01HN1N36ZD808Y79TP@xxxxxxxxxxxxxxxx>; Tue, 14 Feb 1995 16:08:23 -0400 (EDT)]

> I thought the theoretical story would be more transparent. For
> example, if we were to tell a story about a asset market
> equilibrium and a stable money demand function, we need add
> only two components: an integrated forcing variable for money demand
> (there is evidence of this for both the real rate and for income)
> monetary authority that adjusts policy through innovations in
> money growth rates (rather than levels) So, I cannot see why
> you would find this example "theoretically
> vacuous" or "meaningless". It has the very natural interpretation
> that money and prices don't have a long run link but inflation
> is still tied to money growth. --Alan G. Isaac
>
>
> On Tue, 14 Feb 1995 09:18:00 -0700 <ACSLKS@xxxxxxxxxxxxxxxx> said:
> >It is a counter-example inasmuch as it represents a relationship that one can
> >actually correlate, but it is theoretically vacuous.  If inflation and money
> >growth are cointegrated, then both are I(1) and the first differences of each
> >would appear in the ECM along with the cointegrating term (of course the first
> >differences would amount to second differences for these variables).  The same
> >would be the case for estimating a real money demand or supply relation.
> >
> >I see no problem with your case involving real money, inflation, and money
> >growth.
> >
> >Lonnie K. Stevans
> >

I believe you misunderstood me.  I did not mean the relationship you posed
between real money, inflation, and money growth was theoretically vacuous.  I
was referring to my previous message in which it was implied that successive
differencing will sooner or later lead to a CI process.

Lonnie K. Stevans