Working Paper: NBER ID: w2228
Authors: James H. Stock; Mark W. Watson
Abstract: Previous authors have reached puzzlingly different conclusions about the usefulness of money for forecasting real output based on closely related regression-based tests. An examination of this and additional new evidence reveals that innovations in M1 have statistically significant marginal predictive value for industrial production, both in a bivariate model and in a multivariate setting including a price index and an interest rate. This conclusion follows from focusing on the trend properties of the data, both stochastic and deterministic, and from drawing inferences using asymptotic theory that explicitly addresses the implications of these trends for the distributions of the various test statistics.
Keywords: money; income; causality; forecasting; monetary policy
JEL Codes: E51; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money growth (O42) | industrial production (L69) |
| detrended money growth (E19) | industrial production (L69) |
| detrended money growth neutrality (E49) | industrial production (L69) |