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Money does Granger-cause output in the bivariate output-money relation

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  • Lawrence J. Christiano
  • Lars Ljungqvist

Abstract

A bivariate Granger-causality test on money and output finds statistically significant causality when data are measured in log levels, but not when they are measured in first differences of the logs. Which of these results is right? The answer to that question matters because a finding of no Granger-causality from money to output would substantially embarrass existing business cycle models in which money plays an important role [Eichenbaum and Singleton (1986)]. Monte Carlo simulation experiments indicate that, most probably, the first difference results reflect lack of power, whereas the level results reflect Granger-causality that is actually in the data.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 108.

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Date of creation: 1987
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Publication status: Published in Journal of Monetary Economics (Vol.22, n.2, September 1988, pp.217-235)
Handle: RePEc:fip:fedmsr:108

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Related research

Keywords: Monetary theory ; Money theory;

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Cited by:
  1. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  2. Lawrence J Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "How do Canadian hours worked respond to a technology shock?," International Finance Discussion Papers 774, Board of Governors of the Federal Reserve System (U.S.).
  3. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Unit roots in real GNP: do we know, and do we care?," Working Paper Series, Macroeconomic Issues 90-2, Federal Reserve Bank of Chicago.
  4. Fernando Barran & Virginie Coudert & BenoƮt Mojon, 1995. "Interest Rates, Banking Spreads and Credit Supply: The Real Effects," Working Papers 1995-01, CEPII research center.
  5. Jonathan B. Hill, 2004. "Efficient Tests of Long-Run Causation in Trivariate VAR Processes with a Rolling Window Study of the Money-Income Relationship," Macroeconomics 0407013, EconWPA, revised 17 May 2005.
  6. Norman R. Swanson, 2000. "An Out of Sample Test for Granger Causality," Econometric Society World Congress 2000 Contributed Papers 0362, Econometric Society.
  7. Lawrence J. Christiano, 1987. "Why is consumption less volatile than income?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-20.
  8. Bernd Hayo, 1999. "Money-output Granger causality revisited: an empirical analysis of EU countries," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1489-1501.
  9. Lawrence J. Christiano & Richard M. Todd, 2000. "The Conventional Treatment of Seasonality in Business Cycle Analysis: Does it Create Distortions?," NBER Technical Working Papers 0266, National Bureau of Economic Research, Inc.
  10. Yash P. Mehra, 1987. "Velocity and the variability of money growth: evidence from Granger- causality tests reevaluated," Working Paper 87-02, Federal Reserve Bank of Richmond.
  11. James B. Bullard, 1991. "The FOMC in 1990: onset of recession," Review, Federal Reserve Bank of St. Louis, issue May, pages 31-53.
  12. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  13. James H. Stock & Mark W. Watson, 1987. "Interpreting Evidence on Money-Income Causality," NBER Working Papers 2228, National Bureau of Economic Research, Inc.

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