The correlation between money and output in the United Kingdom: resolution of a puzzle

Edward Nelson

No 2012-29, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Friedman and Schwartz (1982) and Goodhart (1982) report a zero correlation between money growth and output growth in U.K. historical data. This finding is puzzling, as there is wide agreement that changes in monetary policy are frequently nonneutral in the short run and that the U.K. experience, in particular, is replete with instances of real effects of monetary policy actions. This paper proposes a resolution to the puzzle. An analysis conducted on subperiods shows that a positive money growth/output growth correlation is indeed recoverable from U.K. historical data. Strike activity in the 1970s and shifts in the terms of trade during the interwar period are the two factors primarily responsible for obscuring the positive correlation between money and output in the United Kingdom.

Date: 2012
New Economics Papers: this item is included in nep-his, nep-mac and nep-mon
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