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Effects of Measurement on Inferences: An Application to Money Demand and Related Variables in the United States

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  • Al-Sharkas, A.A.

  • Lozi, B.M.

Abstract

This paper examines the impact of the choice of a money stock measure on the inference about monetary shocks. To this end, it adopts order-invariant forecast error variance decompositions (FEVD) for an unrestricted vector autoregressive (UVAR) model. This approach does not require orthogonalization of shocks and is invariant to the ordering of the variables in the UVAR. The empirical work is based on estimating UVAR model using different methods of measurement of monetary asset. The results suggest that empirical conclusions from the FEVD analyses differ when money is measured by the flow of monetary services rather than by summation of the dollar amount of monetary asset. Further, the results show that qualitative inference about the money’s effects on the economic activity can depend crucially on the definition of money chosen.

Suggested Citation

  • Al-Sharkas, A.A. & Lozi, B.M., 2009. "Effects of Measurement on Inferences: An Application to Money Demand and Related Variables in the United States," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    • Handle: RePEc:eaa:aeinde:v:9:y:2009:i:1_8
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    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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