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Another look at the evidence on money-income causality

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  • Friedman, Benjamin M.
  • Kuttner, Kenneth N.

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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Suggested Citation

  • Friedman, Benjamin M. & Kuttner, Kenneth N., 1993. "Another look at the evidence on money-income causality," Journal of Econometrics, Elsevier, vol. 57(1-3), pages 189-203.
  • Handle: RePEc:eee:econom:v:57:y:1993:i:1-3:p:189-203
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    References listed on IDEAS

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    1. Litterman, Robert B & Weiss, Laurence M, 1985. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," Econometrica, Econometric Society, vol. 53(1), pages 129-156, January.
    2. 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.
    3. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
    4. 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.
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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