Money, Interest Rates and Output Revisited

Joseph Haslag () and Xue Li
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Joseph Haslag: Department of Economics, University of Missouri-Columbia, https://economics.missouri.edu/people/haslag

No 1507, Working Papers from Department of Economics, University of Missouri

Abstract: There is a long tradition in economic research that studies the relationship between money, interest rates and output. In this paper, we specify VARs using cyclical measures of monetary aggregate, interest rates, and output to assess whether money has marginal predictive content for output. Because there is no consensus on how to identify the cyclical component, we consider four alternatives. One goal is to re-examine the result that when the interest rate variable is included, the marginal predictive content of money become insignificant. In addition, we decompose the monetary aggregates into base money and money multiplier components. In this way, we can determine whether inside money has marginal predictive content for output. We can also assess whether the interest rate has marginal predictive content for the money multiplier. The evidence suggests that with the M2 aggregate, movements in money do temporally precede movements in output. However, the evidence is strong that movements in interest rates temporally precede movements in output. The evidence is mixed regarding the movements in interest rates and future movements in the money multiplier.

Keywords: Detrending methods; marginal predictive content; inside money vs. outside money; time-varying VAR (search for similar items in EconPapers)
JEL-codes: E31 E32 E51 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-04-22
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:1507

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