Transactions Demand for Money and the Inverse Relation Between Inflation and Output: the Case of Korean Economy

This study develops a model of inflation which combines the simple quantity theory with the cash-in-advance model. The econometric results show that (a) the transactions demand for money can explain, contrary to the Phillips curve proposition, the negative relation between inflation and real output growth; (b) the proposition that asset transactions may influence the transactions demand for money independently of fluctuations in real output and interest rate does not stand up even given an extremely active stock market; and (c) the implication of Tsiang's cash-in-advance model that international trade can be a separate source of the transactions demand is not supported. Policy markers should take into account the aggregate demand pressure in the form of nominal money supply growth in excess of growth in money demand, rather than the nominal money supply growth along. [E41]