Why U.S. Money does not Cause U.S. Output, but does Cause Hong Kong Output
Standard econometric tests for whether money causes output will be meaningless if monetary policy is chosen optimally to smooth fluctuations in output. If U.S. monetary policy were chosen to smooth U.S. output, we show that U.S. money will not Granger cause U.S. output. Indeed, as shown by Rowe and Yetman (2000), if there is a (say) 6 quarter lag in the effect of money on output, then U.S. output will be unforecastable from any information set available to the Fed lagged 6 quarters. But if other countries, for example Hong Kong, have currencies that are fixed to the U.S. dollar, Hong Kong monetary policy will then be chosen in Washington D.C., with no concern for smoothing Hong Kong output. Econometric causality tests of U.S. money on Hong Kong output will then show evidence of causality. We test this empirically. Our empirical analysis also provides a measure of the degree to which macroeconomic stabilisation is sacrificed by adopting a fixed exchange rate rather than an independent monetary policy.
|Date of creation:||2001|
|Date of revision:||Nov 2007|
|Publication status:||Published: Revised version in Journal of International Money and Finance, Vol. 26, No. 7 (November 2007), pp. 1174–1186|
|Contact details of provider:|| Postal: C870 Loeb Building, 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada|
|Order Information:|| Email: |
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.:
- Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999.
"Monetary policy shocks: What have we learned and to what end?,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
- Maddala,G. S. & Kim,In-Moo, 1999. "Unit Roots, Cointegration, and Structural Change," Cambridge Books, Cambridge University Press, number 9780521587822, November.
- John Y. Campbell & Pierre Perron, 1991.
"Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots,"
NBER Technical Working Papers
0100, National Bureau of Economic Research, Inc.
- John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
- Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
- Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
- Ekholm, Karolina & Torstensson, Johan, 1996.
"High-Technology Subsidies in General Equilibrium: A Sector-Specific Approach,"
Working Paper Series
467, Research Institute of Industrial Economics.
- Karolina Ekholm & Johan Torstensson, 1997. "High-Technology Subsidies in General Equilibrium: A Sector-Specific Approach," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1184-1203, November.
- James D. Hamilton, 1988. "Role Of The International Gold Standard In Propagating The Great Depression," Contemporary Economic Policy, Western Economic Association International, vol. 6(2), pages 67-89, 04.
- Jon Faust & Eric M. Leeper, 1994.
"When do long-run identifying restrictions give reliable results?,"
International Finance Discussion Papers
462, Board of Governors of the Federal Reserve System (U.S.).
- Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-53, July.
- Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," FRB Atlanta Working Paper 94-2, Federal Reserve Bank of Atlanta.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, December.
- Bernd Hayo, 1999.
"Money-output Granger causality revisited: an empirical analysis of EU countries,"
Taylor & Francis Journals, vol. 31(11), pages 1489-1501.
- Bernd Hayo, 1998. "Money-Output Granger Causality Revisited: An Empirical Analysis of EU Countries," Macroeconomics 9809009, EconWPA.
- Hayo, Bernd, 1998. "Money-output Granger causality revisited: An empirical analysis of EU countries," ZEI Working Papers B 08-1998, University of Bonn, ZEI - Center for European Integration Studies.
- Miyagiwa, Kaz & Ohno, Yuka, 2002. "Uncertainty, spillovers, and cooperative R&D," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 855-876, June.
- Eichengreen, Barry, 1984. "Central bank cooperation under the interwar gold standard," Explorations in Economic History, Elsevier, vol. 21(1), pages 64-87, January.
- Poyago-Theotoky, Joanna, 1998. "R&D Competition in a Mixed Duopoly under Uncertainty and Easy Imitation," Journal of Comparative Economics, Elsevier, vol. 26(3), pages 415-428, September.
- Rowe, Nicholas & Yetman, James, 2000. "Identifying Policy-makers' Objectives: An Application to the Bank of Canada," Staff Working Papers 00-11, Bank of Canada.
- Minoru Kitahara & Toshihiro Matsumura, 2006. "Realized Cost-Based Subsidies For Strategic R&D Investments With "Ex Ante" And "Ex Post" Asymmetries," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 438-448.
- Lakdawalla, Darius & Sood, Neeraj, 2004. "Social insurance and the design of innovation incentives," Economics Letters, Elsevier, vol. 85(1), pages 57-61, October.
- Christina D. Romer and David H. Romer., 1989.
"Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz,"
Economics Working Papers
89-107, University of California at Berkeley.
- Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
- Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
- Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Stephen Martin & John T. Scott, 1999.
"The Nature of Innovation Market Failure and the Design of Public Support for Private Innovation,"
CIE Discussion Papers
1999-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Martin, Stephen & Scott, John T., 2000. "The nature of innovation market failure and the design of public support for private innovation," Research Policy, Elsevier, vol. 29(4-5), pages 437-447, April.
- C. Michael Wernerheim, 2000. "Cointegration and causality in the exports-GDP nexus: The post-war evidence for Canada," Empirical Economics, Springer, vol. 25(1), pages 111-125.
- Petrakis, Emmanuel & Poyago-Theotoky, Joanna, 2002. "R&D Subsidies versus R&D Cooperation in a Duopoly with Spillovers and Pollution," Australian Economic Papers, Wiley Blackwell, vol. 41(1), pages 37-52, March.
- Ahmed M. Khalid & Teo Wee Guan, 1999. "Causality tests of budget and current account deficits: Cross-country comparisons," Empirical Economics, Springer, vol. 24(3), pages 389-402.
- Isabel Busom, 2000. "An Empirical Evaluation of The Effects of R&D Subsidies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 9(2), pages 111-148.
- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
- Choudhri, Ehsan U & Kochin, Levis A, 1980. "The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 565-74, November.
- Bernanke, Ben S, 1995.
"The Macroeconomics of the Great Depression: A Comparative Approach,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 27(1), pages 1-28, February.
- Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
- Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers 16/99, Norwegian School of Economics and Business Administration-.
- Nicholas Rowe & James Yetman, 2002. "Identifying a policymaker's target: an application to the Bank of Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 239-256, May.
When requesting a correction, please mention this item's handle: RePEc:car:carecp:01-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabrina Robineau)
If references are entirely missing, you can add them using this form.