On the behaviour of UK money, velocity, prices, and output in the gold standard period: 1871–1913

Abstract

This article provides evidence in support of cointegration among the UK money supply, real output and the price level in the gold standard period, 1871–1913. The series respond to eliminate short run deviations from the long run equilibrium relation of the equation of exchange. Cointegration is also observed between the UK and US price levels, with the former also responding to eliminate short run deviations from the long run equilibrium relation among the two price levels. Our results for the components of the quantity equation support arguments that the Bank of England moved short-term interest rates in response to changes in domestic economic activity, taken to be an indicator of future changes in its gold reserve position. Our evidence concerning the UK–US price levels supports the rising position of the United States as an economic power during this period.