TESTING THE CAUSAL RELATIONSHIP BETWEEN DOMESTIC CREDIT AND RESERVE COMPONENTS OF A COUNTRY'S MONETARY BASE

Edgar L .Feige () and James M. Johannes
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James M. Johannes: University of Wisconsin-Madison

International Finance from EconWPA

Abstract: 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.

Keywords: Causality tests; Monetary approach to balance of payments; domestic credit; reserves; monetary base (search for similar items in EconPapers)
JEL-codes: E50 G15 F47 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2004-04-29
Note: Type of Document - pdf; pages: 22

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0404016

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