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Testing The Causal Relationship Between Domestic Credit And Reserve Components Of A Country'S Monetary Base


  • Edgar L. Feige

    (University of Wisconsin-Madison)

  • James M. Johannes

    (University of Wisconsin-Madison)


An important factor that helps distinquish between alternative balance of payments theories is the assumed causal relationship between the domestic credit and reserve components of a country's monetary base. This paper reports test results of this causal relationship in Austrailia, Belgium, France, Germany, Norway and Sweden. Three causal detection methods are used: the haugh test, the granger test and the Sims test. Two conclusions are drawn. First, the causal relationship does not run unidirectionally from domestic credit to reserves as the Monetary Approach to the Balance of Paymewnts and many tests of that approach assume. Second, the results are quite robust across alternative causality tests.

Suggested Citation

  • Edgar L. Feige & James M. Johannes, 2004. "Testing The Causal Relationship Between Domestic Credit And Reserve Components Of A Country'S Monetary Base," International Finance 0404016, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0404016 Note: Type of Document - pdf; pages: 22

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    References listed on IDEAS

    1. Alicia García Herrero & Javier Santillán & Sonsoles Gallego & Lucía Cuadro & Carlos Egea, 2002. "Latin American Financial Development in Perspective," Working Papers 0216, Banco de España;Working Papers Homepage.
    2. Clarke, George & Cull, Robert & Martinez Peria, Maria Soledad & Sanchez, Susana M., 2001. "Foreign bank entry - experience, implications for developing countries, and agenda for further research," Policy Research Working Paper Series 2698, The World Bank.
    3. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
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    More about this item


    Causality tests; Monetary approach to balance of payments; domestic credit; reserves; monetary base;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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