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Interest Rates and M2 in an Error-Correction Macro Model

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  • William C. Whitesell

Abstract

With annual data, real M2 is shown to have a surprisingly strong contemporaneous and leading relationship to GDP, that is robust to the inclusion of other explanatory variables. When combined and tested with parsimonious error correction equations for money demand, price determination, and a monetary policy reaction function, an overall macroeconometric model is revealed with an unusually good fit aside from a velocity shift adjustment needed for the early 1990s and better inflation performance than expected of late. A regime shift is evident in the stronger response of the Federal Reserve to inflation in the 1980s than in the previous two decades.

Suggested Citation

  • William C. Whitesell, "undated". "Interest Rates and M2 in an Error-Correction Macro Model," Finance and Economics Discussion Series 1997-59, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    • Handle: RePEc:fip:fedgfe:1997-59
    as

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    File URL: http://www.federalreserve.gov/pubs/feds/1997/199759/199759pap.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Money; M2; macroeconometric model; p-star;
    All these keywords.

    JEL classification:

    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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