A Note on the Power of Money‐Output Causality Tests

Yin-Wong Cheung and Eiji Fujii

Oxford Bulletin of Economics and Statistics, 2001, vol. 63, issue 2, 247-261

Abstract: This study suggests that some empirical findings against money‐output causality can be the consequence of ignoring autoregressive conditional heteroskedastic (ARCH) errors. Monte Carlo results confirm that ARCH effects drastically reduce the power of the standard causality test. The maximum likelihood approach allowing for ARCH effects, on the other hand, provides a good power performance. Using different specifications and sample period, Friedman and Kuttner (1993) and Thomas (1994) report limited evidence of money causing output. We detect significant ARCH effects in the models considered by these studies. Once ARCH effects are explicitly accounted for, we find that the monetary effect is significant though its magnitude is quite small.

Date: 2001
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