Money, Debt and Prices in the United Kingdom

Abstract

This paper is concerned with testing the asset theory of the price level using quarterly UK data over the period 1968-1979. Expressed in its most general form, the asset theory states that the aggregate price level (P) is related to real variables such as the level of economic activity (Y), financial wealth and the composition of wealth in terms of financial assets such as money (M), government bonds (B), etc. This theory has a long tradition and has been revived and developed by Blinder and Solow (1973), among many others. For the present we limit our attention to only two financial assets, namely money and government bonds, although in principle this set could be enlarged. This preoccupation reflects the attention paid to money and bonds in the literature and the requirement that financial assets should be of the outside variety, which precludes bank lending, corporate liabilities, etc. Hence our general specification of the price level is