Money and economic activity revisited

Recent literature has concluded that money no longer plays a fundamental role in determining US economic activity, especially when post-1982 data are included in the analysis. We re-examine the issue using annual and quarterly data sets ranging back to the Civil War. Cointegration tests show that an...

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Bibliographic Details
Published in:Journal of international money and finance 1997-12, Vol.16 (6), p.955-968
Main Authors: Davis, Mark S., Tanner, J.Ernest
Format: Article
Language:English
Subjects:
Economic activity
History
International finance
Money
Money supply
Output
Studies
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Summary:Recent literature has concluded that money no longer plays a fundamental role in determining US economic activity, especially when post-1982 data are included in the analysis. We re-examine the issue using annual and quarterly data sets ranging back to the Civil War. Cointegration tests show that an equilibrium relationship holds between money and income in all data samples of 35 years or longer, but frequently fails to hold for many shorter samples. However, when the normal monetary lags are explicitly imposed, a cointegrating relationship is frequently captured, even in quite short samples. Examining the issue in a standard five-variable VAR model, we find that money is the most important variable in explaining real output for the full 1874–1993 as well as 1952–1993 periods, even allowing for interest rate effects. Finally, using monthly data over the troublesome 1983–1994 sample, we show that when appropriate adjustments are made to capture recent structural changes, such as the growing importance of the international economy on US output, money still Granger-causes economic activity.
ISSN:0261-5606
1873-0639
DOI:10.1016/S0261-5606(97)00038-7