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U.S. Domestic Money, Inflation and Output

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Author Info
Yunus Aksoy
Tomasz Piskorski

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Abstract

Recent empirical research found that the strong short-term relationship between monetary aggregates and US real output and inflation, as outlined in the classical study by M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of the B. Friedman and Kuttner (1992) information value approach, we reevaluate the vanishing relationship between US monetary aggregates and these macroeconomic fundamentals by taking into account the international currency feature of the US dollar. In practice, by using official US data for foreign flows constructed by Porter and Judson (1996) we find that domestic money (currency component of M1 corrected for the foreign holdings of dollars) contains valuable information about future movements of US real output and inflation. Statistical evidence here provided thus suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates.

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Paper provided by EconWPA in its series Macroeconomics with number 0401007.

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Length: 49 pages
Date of creation: 26 Jan 2004
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Handle: RePEc:wpa:wuwpma:0401007

Note: Type of Document - pdf; prepared on WinXP; pages: 49; figures: 11
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Web page: http://129.3.20.41

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Related research
Keywords: Foreign holdings; US monetary aggregates; information value; Friedman-Schwartz's evidence;

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November. [Downloadable!] (restricted)
    Other versions:
  2. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  3. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
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  4. Richard G. Anderson & Robert H. Rasche, 2000. "The domestic adjusted monetary base," Working Papers 2000-002, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October. [Downloadable!] (restricted)
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  6. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, EconWPA. [Downloadable!]
  7. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-1), pages 77-146. [Downloadable!]
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  8. Brian M. Doyle, 2000. ""Here, dollars, dollars ..."estimating currency demand and worldwide currency substitution," International Finance Discussion Papers 657, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September. [Downloadable!] (restricted)
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  10. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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  11. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlos Esteban Posada & Andrés Felipe García, . "¿No importa la cantidad de dinero?: "Inflation Targeting" y la teoría cuantitativa," Borradores de Economia 403, Banco de la Republica de Colombia. [Downloadable!]
    Other versions:
  2. Yunus Aksoy & Miguel León-Ledesma, 2004. "Interest Rates and Output in the Long-run," Studies in Economics 0409, Department of Economics, University of Kent. [Downloadable!]
    Other versions:
  3. Michael Graff, 2008. "The Quantity Theory of Money in Historical Perspective," KOF Working papers 08-196, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
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