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

Listed author(s):
  • 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.

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Paper provided by EconWPA in its series International Finance with number 0404016.

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Length: 22 pages
Date of creation: 29 Apr 2004
Handle: RePEc:wpa:wuwpif:0404016
Note: Type of Document - pdf; pages: 22
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