Are price equations really money demand equations on their heads?

Several authors have argued that the endogenous variable in money demand equations is really the price level, the money stock itself being exogenous. Although this view has been widely adopted, it has not been subjected to much econometric testing. In this paper we outline the econometric issues involved in testing the exogenous money/endogenous price view of the money market, and subject this view to a variety of tests using three different data sets. None of our results support the view that the price level is determined in the money market. Fundamental restrictions are rejected at very high levels of significance, and reasonably good money demand equations are seen to be badly misspecified if they are re-estimated as price equations.