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Money balances in the production function: Nonlinear tests of model stability and measurement issues – two sides of the same coin?

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  • Stokes, Houston H.

Abstract

Past empirical attempts to test the role of money in the production function following the Sinai and Stokes (1972) preliminary Cobb–Douglas model specification estimated in 1929–1967, using yearly data, have focused on estimating alternative production function models, such as CES and Translog, and experimenting with alternative specifications of the monetary variable. Most research in the United States on this topic has involved four basic datasets: annual data in the period 1929–1967, nonfinancial quarterly data in the period 1953:1 to 1977:3, annual data in the period 1930–1978 and annual data in the period 1959–1985. The current research uses MARS modeling, general additive modeling, flexible least squares and VAR methods to assess whether there is evidence of nonlinearity and/or model structural change that is impacted by whether a monetary variable has been added to the model specification or a different period is under study. VAR modeling is used with the nonfinancial quarterly dataset to assess whether shocks in the financial sector, as measured by log real M2, can impact the real sector. Since a significant impact is found on log capital, log labor and log real output, the implication is that the real sector is not isolated from the financial sector. One way to think of this is that shocks to the financial sector can have dynamic effects on the real sector.

Suggested Citation

  • Stokes, Houston H., 2013. "Money balances in the production function: Nonlinear tests of model stability and measurement issues – two sides of the same coin?," The Journal of Economic Asymmetries, Elsevier, vol. 10(2), pages 101-114.
    • Handle: RePEc:eee:joecas:v:10:y:2013:i:2:p:101-114
    DOI: 10.1016/j.jeca.2014.01.001
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    References listed on IDEAS

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    Cited by:

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    2. Bitros, George C., 2020. "Demand adjusted capital input and potential output in the context of U.S. economic growth," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).

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