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Does Uncertainty Impact Money Growth? A Multivariate GARCH Analysis

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  • Cronin, David

    (Central Bank and Financial Services Authority of Ireland)

  • Kennedy, Bernard

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The impact of uncertainty on money growth has occupied a prominent place in monetary policy analysis in recent years. Some papers examining this issue use ad hoc estimates and measure variability rather than uncertainty. We employ a multivariate GARCH model, which measures uncertainty by the conditional variance of the data series, to investigate whether macroeconomic uncertainty and monetary uncertainty Granger-cause changes in real money. We find that macroeconomic uncertainty impacts positively on US real M2 growth over a one- to two-year horizon but that monetary uncertainty does not cause changes. Instead, our results indicate that real money growth causes monetary uncertainty.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 6/RT/07.

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Length: 18 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:cbi:wpaper:6/rt/07

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  1. Choi, Woon Gyu & Oh, Seonghwan, 2003. " A Money Demand Function with Output Uncertainty, Monetary Uncertainty, and Financial Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 685-709, October.
  2. Stilianos Fountas & Menelaos Karanasos, 2002. "Inflation, Output Growth, and Nominal and Real Uncertainty: Empirical Evidence for the G7," Working Papers 0064, National University of Ireland Galway, Department of Economics, revised 2002.
  3. Lemke, Wolfgang & Greiber, Claus, 2005. "Money demand and macroeconomic uncertainty," Discussion Paper Series 1: Economic Studies 2005,26, Deutsche Bundesbank, Research Centre.
  4. Carstensen, Kai, 2006. "Stock market downswing and the stability of European monetary union money demand," Munich Reprints in Economics 19940, University of Munich, Department of Economics.
  5. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
  6. Friedman, Milton, 1983. "Monetary Variability: United States and Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 339-43, August.
  7. Carstensen, Kai, 2006. "Stock Market Downswing and the Stability of European Monetary Union Money Demand," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 395-402, October.
  8. Serletis, Apostolos & Shahmoradi, Akbar, 2006. "Velocity And The Variability Of Money Growth: Evidence From A Varma, Garch-M Model," Macroeconomic Dynamics, Cambridge University Press, vol. 10(05), pages 652-666, November.
  9. Michael T. Belongia, 1984. "Money growth variability and GNP," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 23-31.
  10. Mehra, Yash P, 1989. "Velocity and the Variability of Money Growth: Evidence from Granger-Causality Tests: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 262-66, May.
  11. Friedman, Milton, 1988. "Money and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 221-45, April.
  12. Joseph Atta-Mensah, 2004. "Money Demand and Economic Uncertainty," Working Papers 04-25, Bank of Canada.
  13. Stilianos Fountas & Menelaos Karanasos & Jinki Kim, 2006. "Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(3), pages 319-343, 06.
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