New Evidence on Causal Relationships between Money Supply, Prices and Wages in the United Kingdom

Abstract

The paper re-examines empirically the causal relationship between money stock, prices and wages in the United Kingdom. Using a vector error-correction modelling technique with suitable diagnostics, such as Akaike's FPE statistics and `F' tests for under-fitting the causal model, the results indicate a feedback relationship between money and prices, prices and wages, and wages and money stock. The results are supportive of the expectations- augmented Phillips-curve view of inflation and the monetary accommodation hypothesis.