IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Assertion without empirical basis : an econometric appraisal of monetary trends in ... the United Kingdom, by Milton Friedman and Anna J. Schwartz

Listed author(s):
  • David F. Hendry
  • Neil R. Ericsson

This paper critically re-evaluates some of the fundamental empirical claims about monetary behavior in the United Kingdom made by Milton Friedman and Anna J. Schwartz in their 1982 book Monetary Trends in the United States and the United Kingdom. We focus on six aspects of their analysis: the exogeneity of money; their claims of the constancy and correct specification of their money-demand equation; their interpretation of a dummy variable in that equation as capturing a "shift in liquidity preference" for 1921-55; their treatment of the interdependence of money, income, prices, and interest rates; and their use of phase-average data. They fail to support many of their empirical assertions with valid econometric evidence: in particular, they leave untested many conditions necessary to sustain their inferences. However, those conditions either are in part directly testable from their data or have testable implications: we test many of those hypotheses and reject virtually all of them. We reject basic claims made for their empirical model of money demand, e.g., those of parameter constancy, price homogeneity, and normality of the disturbances. En route, we show that their model of velocity as a constant performs poorly relative to the "will-o'-the-wisp" model of velocity as a random walk. As constructive evidence against their models, we develop a money-demand model superior to either model of velocity, and which has an unexplained residual variance less than one tenth that of their money-demand equation. This paper, however, is not an "anti-monetarist" critique; rather, it is a pro-econometrics tract which highlights the practical dangers of seeking to analyze complex stochastic processes while eschewing modern econometric methods.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

File URL:
Download Restriction: no

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 270.

in new window

Date of creation: 1985
Handle: RePEc:fip:fedgif:270
Contact details of provider: Postal:
20th Street and Constitution Avenue, NW, Washington, DC 20551

Web page:

More information through EDIRC

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:270. 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: (Franz Osorio)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.