A Note on the Power of Money‐Output Causality Tests
| Author | Yin‐Wong Cheung,Eiji Fujii |
| Date | 01 May 2001 |
| Published date | 01 May 2001 |
| DOI | http://doi.org/10.1111/1468-0084.00219 |
A note on the power of money-output
causality testsy
Yin-Wong Cheung and Eiji Fujii
Department of Economics, University of California, Santa Cruz
Department of Economics, Otaru University of Commerce, Japan
efujii@res.otaru-uc.ac.jp
I. Introduction
The role of money and its effects on national output have generated a
voluminous amount of literature (Blanchard, 1990; Lucas, 1996; Sargent,
1996). Since Friedman and Schwartz (1963) rekindled the research on the
effects of money on aggregate output, numerous studies have aimed to
characterize and establish the interactions between money and output. Theor-
etical models are constructed to show that money can affect output via
different channels, including unanticipated monetary shocks, real and nom-
inal rigidities, and menu costs. However, the accumulated empirical results,
which are derived from different speci®cations, different sample periods, and
data from different countries, still do not give a de®nite answer to the
question of whether money affects output. Also, there are diverse opinions
on how money affects output.
Most empirical studies adopt a vector autoregression (VAR) framework or
a modi®ed one to analyze the causal relationship between money and output
following the two seminal studies by Sims (1972, 1980). A basic regression
equation has output as the dependent variable and lagged output and money
as regressors. The basic speci®cation is often augmented with additional
macroeconomic variables as controlling variables. The statistical signi®cance
of the lagged money variable is used to evaluate the effects of money.
Depending on the choices of sample periods, controlling variables, and data
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 63, 2 (2001) 0305-9049
#Blackwell Publishers Ltd, 2001. Published byBlackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UKand 350
Main Street, Malden, MA 02148, USA.
247
yWe are grateful to Jonathan Temple (the editor), Menzie Chinn, Mike Dooley, Carl Walsh, and
seminar participants of the Western Economic Association 73rd Annual Conference for their com-
ments and suggestions. The usual disclaimer applies.
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