3A_-_Evidence (1).pdf - Evidence on money and economic activity Antonella Trigari October 2012 Readings • Mishkin chapter 23 9th edition • G

3A_-_Evidence (1).pdf - Evidence on money and economic...

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Evidence on money and economic activity Antonella Trigari October 2012
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Readings Mishkin, chapter 23, 9 th edition G. McCandless and W. Weber, “Some Monetary Facts,” FRBN Quarterly Review 19, 2005
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Plan Look at evidence on the behavior of: Prices Monetary aggregates and interest rates Output Issues: Neutrality of money R l ff f ( li f ) Real effects of money (non neutrality of money) Short run versus long run
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Long run relationships Long run relationships Question: is money neutral in the long run? Answer: yes McCandless and Weber (1995): what do they do? 110 countries, 30 years (1960 1990) Statistical long run correlations across countries of 1 inflation and money growth rate 1. 2. real GDP growth and money growth rate 3. inflation and real GDP growth Use three definitions of a country’s money supply (M0, M1 and M2) and two subsamples of countries (21 OECD countries, 14 Latin American countries)
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Long run relationships cont Long run relationships, cont. McCandless and Weber (1995): what do they obtain? 1. Growth rates of money supply and the general price level are highly correlated for all three money definitions, for the full sample of countries, and for both subsamples 1 The growth rates of money and real output are not correlated except for a subsample of 1. The growth rates of money and real output are not correlated, except for a subsample of countries in the OECD, where these growth rates are positively correlated 1. The rate of inflation and the growth rate of real output are essentially uncorrelated
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Money growth and inflation in the long run Very high correlation, almost unity True across subsamples of countries Correlation slightly higher for M1 and M2
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Money growth and inflation in the long run cont Money growth and inflation in the long run, cont. Very high correlation Individual countries observations lie on the 45 degree line: slope of relationship close to unity Consistent with quantitative theory of money: M x V = P x Y Δ log M + Δ log V = Δ log P + Δ log Y m + v = π + y π = m y + v
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Money growth and inflation in the long run cont Money growth and inflation in the long run, cont. Correlation does not have any implications for causality. That is, correlation does not necessarily imply that money causes inflation . Two issues: 1.Reverse causality It may be that correlation is due to inflation causing money, with money being endogenous Consider a single country where the CB follows a feedback monetary policy rule where the h f i d i d b h i fl i ld b f growth rate of money is determined by the inflation rate we would observe perfect correlation between money and inflation for that country McCandless and Weber use a large set of countries in the hope that correlation will be free of policy rule influences 2.Outside driving factor An outside factor could be the driving force behind two variables that move together Yet, while correlations are not direct evidence of causality, they support causal hypotheses that yield predictions consistent with the correlations
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