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Another Look at the Evidence on Money-Income Causality

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  • Benjamin M. Friedman
  • Kenneth N. Kuttner

Abstract

Stock and Watson's widely noted finding that money has statistically significant marginal predictive power with respect to real output (as measured by industrial production), even in a sample extending through 1985 and even in the presence of a short-term interest rate, is not robust to two plausible changes. First, extending the sample through 1990 renders money insignificant within Stock and Watson's chosen specification. Second, using the commercial paper rate in place of the Treasury bill rate renders money insignificant even in the sample ending in 1985. A positive finding is that the difference between the commercial paper rate and the Treasury bill rate does have highly significant predictive value for real output, even in the presence of money, regardless of sample. Alternative results based on forecast error variance decomposition in a vector autoregression setting confirm these findings by indicating a small and generally insignificant effect of money, and a large, highly significant effect of the paper-bill spread, on real output.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3856.

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Date of creation: Jan 1994
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Publication status: published as Journal of Econometrics, Volume 57, Issues 1-3, pp. 189-203, (May-June 1993)
Handle: RePEc:nbr:nberwo:3856

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  1. Benjamin M. Friedman, 1984. "The value of intermediate targets in implementing monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 169-199.
  2. Robert B. Litterman & Laurence M. Weiss, 1984. "Money, real interest rates, and output: a reinterpretation of postwar U.S. data," Staff Report 89, Federal Reserve Bank of Minneapolis.
  3. Martin S. Eichenbaum & Kenneth J. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Post-War U.S. Business Cycles?," NBER Working Papers 1932, National Bureau of Economic Research, Inc.
  4. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
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