Money-Income Granger-Causality in Quantiles

Tae Hwy Lee and Weiping Yang
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Weiping Yang: University of California, Riverside

No 201423, Working Papers from University of California at Riverside, Department of Economics

Abstract: The causal relationship between money and income (output) has been an important topic and has been extensively studied. However, those empirical studies are almost entirely on Granger-causality in the conditional mean. Compared to conditional mean, conditional quantiles give a broader picture of an economy in various scenarios. In this paper, we explore whether forecasting conditional quantiles of output growth can be improved using money growth information. We compare the check loss values of quantile forecasts of output growth with and without using past information on money growth, and assess the statistical significance of the loss-differentials. Using U.S. monthly series of real personal income or industrial production for income and output, and M1 or M2 for money, we find that out-of-sample quantile forecasting for output growth is significantly improved by accounting for past money growth information, particularly in tails of the output growth conditional distribution. On the other hand, money-income Granger-causality in the conditional mean is quite weak and unstable. These empirical findings in this paper have not been observed in the money-income literature. The new results of this paper have an important implication on monetary policy, because they imply that the effectiveness of monetary policy has been under-estimated by merely testing Granger-causality in conditional mean. Money does Granger-cause income more strongly than it has been known and therefore information on money growth can (and should) be more utilized in implementing monetary policy.

Keywords: Money-income Granger-causality; Conditional mean; Conditional quantiles; Conditional distribution (search for similar items in EconPapers)
JEL-codes: C32 C5 E4 E5 (search for similar items in EconPapers)
Pages: 24 Pages
Date: 2014-09, Revised 2012-09
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-mon
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Citations: View citations in EconPapers (17)

Published in Advances in Econometrics, Volume 30, Chapter 12, pages 383-407, Millimet, D. and Terrell, D. (ed.), Emerald Publishers. December 2012.

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https://economics.ucr.edu/repec/ucr/wpaper/201423.pdf First version, 2014 (application/pdf)
https://economics.ucr.edu/repec/ucr/wpaper/201423R.pdf Revised version, 2012 (application/pdf)

Related works:
Chapter: Money–Income Granger-Causality in Quantiles (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:201423

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