Causality and correlations of output and nominal variables in a real business cycle model

Chan Guk Huh

No 92-03, Working Papers in Applied Economic Theory from Federal Reserve Bank of San Francisco

Abstract: A dynamic general equilibrium economy in which output is exogenous with respect to money is calibrated and simulated following a procedure commonly used in real business cycle literature. It is then confronted with the key comovement patterns of output and nominal variables in the post-war U.S. time series data. The model economy performs well in matching key second moment patterns involving output, money and price. The model economy - with its embedded 'reverse causation' from output to money - also provides the means for carrying out a probabilistic appraisal of the observed money to output Granger causality in U. S. data. Repeated applications of the Granger causality test to simulated data lead to find that money causes output more often than expected.

Keywords: Business cycles; Econometric models (search for similar items in EconPapers)
Date: 1992
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