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The correlation between money and output in the United Kingdom: resolution of a puzzle

  • Edward Nelson

Friedman and Schwartz (1982) and Goodhart (1982) report a zero correlation between money growth and output growth in U.K. historical data. This finding is puzzling, as there is wide agreement that changes in monetary policy are frequently nonneutral in the short run and that the U.K. experience, in particular, is replete with instances of real effects of monetary policy actions. This paper proposes a resolution to the puzzle. An analysis conducted on subperiods shows that a positive money growth/output growth correlation is indeed recoverable from U.K. historical data. Strike activity in the 1970s and shifts in the terms of trade during the interwar period are the two factors primarily responsible for obscuring the positive correlation between money and output in the United Kingdom.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-29.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-29
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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  2. Ravn, Morten O, 1997. "Permanent and Transitory Shocks, and the UK Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(1), pages 27-48, Jan.-Feb..
  3. Neville Francis & Michael T. Owyang & Athena T. Theodorou, 2005. "What explains the varying monetary response to technology shocks in G-7 countries?," Working Papers 2004-002, Federal Reserve Bank of St. Louis.
  4. Benjamin, Daniel K & Kochin, Levis A, 1979. "Searching for an Explanation of Unemployment in Interwar Britain," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 441-78, June.
  5. Dwyer, Gerald P, Jr, 1985. "Money, Income, and Prices in the United Kingdom: 1870-1913," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 415-35, July.
  6. Laidler, David, 1982. "Friedman and Schwartz on Monetary trends: A review article," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 293-305, January.
  7. Stock, James H., 1987. "Measuring Business Cycle Time," Scholarly Articles 3425950, Harvard University Department of Economics.
  8. Julia Campos & Neil R. Ericsson & David F. Hendry, 1987. "An analogue model of phase-averaging procedures," International Finance Discussion Papers 303, Board of Governors of the Federal Reserve System (U.S.).
  9. N. Kundan Kishor & Levis A. Kochin, 2007. "The Success Of The Fed And The Death Of Monetarism," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 56-70, 01.
  10. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, June.
  11. Cobham, David P, 1980. "The Influence of the United Kingdom's Public Sector Deficit on Its Money Stock, 1963-76: Some Comments," Bulletin of Economic Research, Wiley Blackwell, vol. 32(2), pages 121-29, November.
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