ec3332-SemI1112Lec7 (1)

ec3332-SemI1112Lec7 (1) - Money and Banking I EC3332 Sem I,...

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Money and Banking I EC3332 Sem I, 2011-2012 Lec 8: Money Stock Fluctuations
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Money and Output Positive correlation between the nominal stock and real output. This is pointed out in the work of Friedman and Schwartz which underlies “monetarism” The monetary authority has the power to change the money stock at will. So it seems that the monetary authority can stimulate real output at will.
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McCandless and Weber (1995, FRBMinnQR)
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McCandless and Weber (1995, FRBMinnQR)
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McCandless and Weber (1995, FRBMinnQR)
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McCandless and Weber (1995, FRBMinnQR)
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Granger Causality Chris Sims (1980) introduced idea of “Granger causality”. It is used to see if one time series is useful in predicting another one. Awarded Nobel Prize for Economics, 2011.
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Granger Causality A time series X is said to Granger-cause Y if it can be shown, usually through a series of F-tests on lagged values of X (and with lagged values of Y also known), that those X values provide statistically significant information about future values of Y .
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Correlation and Causality An observed correlation between two variables > one of the variables causes the other to change. Changes in some third variable may cause the changes in both variables. Despite its name, Granger causality does not imply true causality. If both X and Y are driven by a common third process with different lags,Granger causality could still be statistically significant. Yet, manipulation of one process would not change the other. Indeed, the Granger test is designed to handle pairs of variables, and may produce misleading results when the true relationship involves three or more variables.
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VAR The modern approach uses VAR (Vector Auto- Regression) pioneered by Chris Sims. This looks at time-series of macroeconomic variables, e.g. y, M and looks at auto- correlations: correlations with contemporaneous correlations. Used to study “impulse response” functions – variances and co-variance structure of macroeconomic time series
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Money Stock Fluctuations In real-world data: Fluctuations in various measures of the money stock. Central banks often miss their targets for the money stock.
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Total Money Stock (i) Definition: M1 = M × money multiplier. If M1 changes but M doesn’t => changes in the monetary multiplier. Reserve requirements ( γ ) do not change often. Something else must explain observed fluctuations of the money multiplier.
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Money multiplier (M1/M) and real output
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Innovation An innovation in some variable: the difference between a variable’s actual value and the value predicted by the variable’s recent behaviour. The unpredicted change, or surprise, in a variable.
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Some facts “Stylized facts:” 1.
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ec3332-SemI1112Lec7 (1) - Money and Banking I EC3332 Sem I,...

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