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Money Balances in the Production Function: A Retrospective Look


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  • Allen Sinai

    (Boston Company Economic Advisors
    Brandeis University)

  • Houston H. Stokes

    (University of Illinois, Chicago)


This paper surveys the literature on real balances in the production function since Sinai-Stokes (1972). The discussion has now moved beyond the question of real balances belonging in the production function to the issue of how to model the effect of the financial sector on the real economy. Results reported argue that the effect of the degree of optimality of the financial sector (as measured by the interest rate) is a significant shift parameter in the production function. While this specification may be improved on in future work, results to date indicate that an aggregate production function that does not take into account the effects of the financial sector is not completely specified.

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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 15 (1989)
Issue (Month): 4 (Oct-Dec)
Pages: 349-363

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Handle: RePEc:eej:eeconj:v:15:y:1989:i:4:p:349-363

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  1. Ben-Zion, Uri & Ruttan, Vernon W, 1975. "Money in the Production Function: An Interpretation of Empirical Results," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 246-47, May.
  2. Moroney, John R, 1972. "The Current State of Money and Production Theory," American Economic Review, American Economic Association, vol. 62(2), pages 335-43, May.
  3. Short, Eugenie Dudding, 1979. "A New Look at Real Money Balances as a Variable in the Production Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 326-39, August.
  4. Subrahmanyam, Ganti, 1980. "Real Money Balances as a Factor of Production: Some New Evidence," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 280-83, May.
  5. Boyes, William J & Kavanaugh, David C, 1979. "Money and the Production Function: A Test for Specification Errors," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 442-46, August.
  6. Dufour, Jean-Marie, 1982. "Recursive stability analysis of linear regression relationships: An exploratory methodology," Journal of Econometrics, Elsevier, vol. 19(1), pages 31-76, May.
  7. Nguyen, Hong V, 1986. "Money in the Aggregate Production Function: Reexamination and Further Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(2), pages 141-51, May.
  8. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1.
  9. Nadiri, M Ishaq, 1969. "The Determinants of Real Cash Balances in the U.S. Total Manufacturing Sector," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 173-96, May.
  10. Keith Christian Jensen & Shyam Kamath & Robert Bennett, 1987. "Money in the Production Function: An Alternative Test Procedure," Eastern Economic Journal, Eastern Economic Association, vol. 13(3), pages 259-269, Jul-Sep.
  11. Johnson, Harry G, 1969. "Inside Money, Outside Money, Income, Wealth, and Welfare in Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 30-45, February.
  12. Niccoli, Alberto, 1975. "Real Money Balances: An Omitted Variable from the Production Function? A Comment," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 241-43, May.
  13. Prais, Zmira, 1975. "Real Money Balances as a Variable in the Production Function: A Comment," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 243-44, May.
  14. Pierson, Gail, 1972. "The Role of Money in Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 383-95, August.
  15. Jong S. You, 1981. "Money, Technology, and the Production Function: An Empirical Study," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 515-24, August.
  16. Otto Eckstein & Allen Sinai, 1986. "The Mechanisms of the Business Cycle in the Postwar Era," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 39-122 National Bureau of Economic Research, Inc.
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Cited by:
  1. Benchimol , Jonathan, 2013. "Money in the Production Function: a new Keynesian DSGE perspective," ESSEC Working Papers WP1304, ESSEC Research Center, ESSEC Business School.
  2. repec:hal:cesptp:hal-00800539 is not listed on IDEAS
  3. repec:hal:wpaper:hal-00800539 is not listed on IDEAS
  4. Seiya Fujisaki, 2012. "Economic Stability and Interest-Rate Controls in an Open-Economy Model with Productive Money," Economics Bulletin, AccessEcon, vol. 32(4), pages 3053-3060.
  5. Odedokun, Matthew O., 1999. "How the Size of the Monetary Sector Affects Economic Growth: Econometric Evidence from Industrial and Developing Countries," Journal of Policy Modeling, Elsevier, vol. 21(2), pages 213-241, March.
  6. Darrat, Ali F. & Al-Yousif, Yousif K., 1998. "Does money matter in developing economies? Some evidence from the Solow estimator," Review of Financial Economics, Elsevier, vol. 7(2), pages 213-220.
  7. Allen Sinai & Houston H. Stokes, 1991. "Real Money Balances in the Production Function: A Comment," Eastern Economic Journal, Eastern Economic Association, vol. 17(4), pages 533-535, Oct-Dec.
  8. Odedokun, M. O., 1996. "Alternative econometric approaches for analysing the role of the financial sector in economic growth: Time-series evidence from LDCs," Journal of Development Economics, Elsevier, vol. 50(1), pages 119-146, June.


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