IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2852.html
   My bibliography  Save this paper

Money, Income and Prices After the 1980s

Author

Listed:
  • Benjamin M. Friedman
  • Kenneth N. Kuttner

Abstract

Three empirical findings presented in this paper show that evidence based on the most recent U.S. experience does not indicate the kind of close or reliable relationship between money and nonfinancial economic activity that, if present, might warrant basing the design and implementation of monetary policy on money in a formally systematic way: First, extending the familiar time-series analysis to include data from the 1980s sharply weakens the evidence from prior periods showing that such relationships existed between money and nominal income, or between money and either real income or prices considered separately. Focusing on data from 1970 onward destroys this evidence altogether. Second, the finding by Stock and Watson that particular forms of time-series experiments still showed a significant role for money in affecting real output through 1985 not only becomes weaker on the inclusion of data from 1986 and 1987 but also, even for data through 1985 only, turns out to depend on the use in their analysis of a particular short-term interest rate, the Treasury bill rate. Using instead the commercial paper rate, which apparently is superior in capturing the information in financial prices that matters for real output, also greatly weakens their result. Simultaneously using the commercial paper rate and including data through 1987 destroys it altogether. Third, extending the analysis through 1987 also destroys the time-series evidence from earlier periods showing that money and income are co-integrated. Even if monetary policy were to be conducted in terms of targets for money growth, the failure of money and income to be co-integrated means that there is no empirical ground for resisting the "base drift" that results from persistent random differences between actual money growth and the corresponding target.

Suggested Citation

  • Benjamin M. Friedman & Kenneth N. Kuttner, 1989. "Money, Income and Prices After the 1980s," NBER Working Papers 2852, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2852 Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2852.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, vol. 63(1), pages 156-172, March.
    2. Rolnick, Arthur J & Weber, Warren E, 1986. "Gresham's Law or Gresham's Fallacy?," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 185-199, February.
    3. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-257, May.
    4. Zellner, Arnold, 1985. "Bayesian Econometrics," Econometrica, Econometric Society, vol. 53(2), pages 253-269, March.
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    6. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-597, November.
    7. 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.
    8. 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.
    9. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    10. 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.
    11. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
    12. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-552, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gertler, Mark & Hubbard, R. Glenn & Kashyap, Anil, 1990. "Interest Rate Spreads, Credit Constraints, And Investment Fluctuations: An Empirical Investigation," Working Papers 90-46, C.V. Starr Center for Applied Economics, New York University.
    2. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
    3. Mark Gertler & R. Glenn Hubbard & Anil Kashyap, 1991. "Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation," NBER Chapters,in: Financial Markets and Financial Crises, pages 11-32 National Bureau of Economic Research, Inc.
    4. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    5. Cohen, Gerald & Alesina, Alberto & Roubini, Nouriel, 1992. "Macroeconomic Policy and Elections in OECD Democracies," Scholarly Articles 4553023, Harvard University Department of Economics.
    6. Paschakis, John & Smithin, John, 1998. "Exchange Risk and the Supply-Side Effects of Real Interest Rate Changes," Journal of Macroeconomics, Elsevier, pages 703-720.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2852. 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: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.