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Interpreting Evidence on Money-Income Causality

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  • James H. Stock
  • Mark W. Watson

Abstract

Previous authors have reached puzzlingly different conclusions about the usefulness of money for forecasting real output based on closely related regression-based tests. An examination of this and additional new evidence reveals that innovations in M1 have statistically significant marginal predictive value for industrial production, both in a bivariate model and in a multivariate setting including a price index and an interest rate. This conclusion follows from focusing on the trend properties of the data, both stochastic and deterministic, and from drawing inferences using asymptotic theory that explicitly addresses the implications of these trends for the distributions of the various test statistics.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2228.

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Date of creation: Apr 1987
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Publication status: published as Journal of Econometrics, Vol. 40, No. 1, pp. 161-182, January 1989.
Handle: RePEc:nbr:nberwo:2228

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  1. Robert B. Litterman & Laurence Weiss, 1983. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," NBER Working Papers 1077, National Bureau of Economic Research, Inc.
  2. Lawrence J. Christiano & Martin Eichenbaum, 1987. "Temporal aggregation and structural inference in macroeconomics," Working Papers, Federal Reserve Bank of Minneapolis 306, Federal Reserve Bank of Minneapolis.
  3. Christopher A. Sims, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," NBER Working Papers 0430, National Bureau of Economic Research, Inc.
  4. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, American Economic Association, vol. 62(4), pages 540-52, September.
  5. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  6. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
  7. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 49-99, January.
  8. Lawrence J. Christiano & Lars Ljungqvist, 1987. "Money does Granger-cause output in the bivariate output-money relation," Staff Report, Federal Reserve Bank of Minneapolis 108, Federal Reserve Bank of Minneapolis.
  9. Ohanian, Lee E., 1988. "The spurious effects of unit roots on vector autoregressions : A Monte Carlo study," Journal of Econometrics, Elsevier, Elsevier, vol. 39(3), pages 251-266, November.
  10. Perron, Pierre & Phillips, Peter C. B., 1987. "Does GNP have a unit root? : A re-evaluation," Economics Letters, Elsevier, Elsevier, vol. 23(2), pages 139-145.
  11. Geweke, John, 1984. "Inference and causality in economic time series models," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 19, pages 1101-1144 Elsevier.
  12. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 363-80, June.
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