growth had to follow a path determined by
U.S. money, at least in the long-run. U.S.
monetary policy, on the other hand, was much
less constrained by its balance of payments, in
part because our economy was much less open
than abroad, and in part because U.S. dollars
were the primary reserves held by foreign cen-
tral banks.
Under these circumstances, foreign money
changes that diverged from U.S. money
growth could not persist indefinitely. Perhaps
a significant portion of money growth abroad
was viewed as transitory; if so, this could ex-
plain why the long-run effect of money on
prices abroad was generally below unity (and
below the U.S. figure) during this period.
Also, perhaps U.S. money growth provided
information about the future direction of for-
eign money growth, in which case it should
have been useful in forecasting foreign infla-
tion as well. Logue and Sweeney provide in-
direct evidence of this, by finding that foreign
nominal income changes were frequently ex-
plained much better by foreign and U.S.
money growth than by foreign money changes
alone.25
During most of the 1970’s, in contrast, coun-
tries were not officially committed to main-
taining fixed exchange rates, so that in princi-
ple, foreign nations were able to vary their
money supply independently of any U.S. ac-
tions. A higher proportion of foreign money
changes thus could be viewed as permanent,
which might help account for the fact that the
long-run effect of money now appears gener-
ally to be higher than before.26 On the other
hand, all countries do not exploit their mone-
tary independence; some have adapted their
policies to others in an attempt to limit fluc-
tuations in the value of their currency. Can-
ada’s policy, for example, has been designed
in part to limit variations in the value of its
currency in terms of the U.S. dollar, even dur-
ing the 1970’s. Not surprisingly, then, the long-
run impact of money on prices apparently re-
mains below one, and although higher than
the 1960’s, is not substantially so.
Our explanation assumes that money changes
now are generally regarded as more persist-
ent—that is, with greater impact upon per-
manent money—than they were in earlier pe-
riods. But is this really the case? To answer
this question would, ideally, require the iden-
tification of the exact relation used by individ-
uals to estimate permanent money. This is a
formidable task, because the process deter-
mining money growth depends upon a variety
of factors, and also involves an unknown time
horizon.
Nonetheless, we can make crude approxi-
mations by estimating the extent to which a
money change typically is offset or reinforced
in subsequent periods; this can be estimated
from the pattern of money growth observed
over the period in question. Specifically, what
is the cumulative total of future money
changes that typically follows a rise in current
money above its long-run average—-that is,
how much would we expect the money stock
to rise ultimately as the result of an initial
increase? This long-run impact should be rel-
atively small when money changes are largely
transient (i.e., offset in the future). Hence, in
our view, the impact might be larger during
the floating-rate period than during the fixed-
rate period; it might also be higher for the
U.S. than for other countries during the earlier
(fixed-rate) period.
Admittedly, this is a crude measure of the
effects of past upon permanent money. In par-
ticular, a pattern where a current increase is
followed by further changes, but ultimately is
completely offset, could substantially affect
permanent money if price-setters’ horizons are
sufficiently short. For this reason, it will also
be useful to examine how the level of the
morey stock varies in the quarters following
the initial shock.
To measure these impacts, we have fitted a
simple (univariate) time-series model of
money-supply changes for each country for
two periods, 1958-67 and 1968-78, again using
quarterly (seasonally adjusted) data. Note that
each of these periods begins several years be-
fore the corresponding intervals used to esti-
mate the results reported in Table 1. This was
40