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Inside Money, Output, and Causality

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  • Freeman, Scott
  • Huffman, Gregory W
Abstract
The authors present an explicit general equilibrium model consistent with these observations: (1) innovations in the nominal money stock are positively correlated with and precede (" Granger-cause") innovations in output; (2) these innovations in the nominal money stock represent innovations in inside, not outside, money; and (3) when interest rates are included in vector autoregressions, their innovations, not money's, are seen to precede output. Changes in the money stock represent an endogenous reaction to some third factor and do not cause subsequent changes in output. Therefore, a change in the current fiat money stock will not lead to any change in output. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Freeman, Scott & Huffman, Gregory W, 1991. "Inside Money, Output, and Causality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 645-667, August.
    • Handle: RePEc:ier:iecrev:v:32:y:1991:i:3:p:645-67
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    Cited by:

    1. Ireland, Peter N., 2003. "Endogenous money or sticky prices?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1623-1648, November.
    2. Boerner, Lars & Ritschl, Albrecht, 2010. "Communal responsibility and the coexistence of money and credit under anonymous matching," SFB 649 Discussion Papers 2010-060, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
    4. Greenwood, Jeremy & Williamson, Stephen D., 1989. "International financial intermediation and aggregate fluctuations under alternative exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 401-431, May.
    5. Finn E. Kydland & Scott Freeman, 2000. "Monetary Aggregates and Output," American Economic Review, American Economic Association, vol. 90(5), pages 1125-1135, December.
    6. Robert R. Reed & Edgar A. Ghossoub, 2013. "Thresholds and the Welfare Cost of Inflation," Working Papers 0186eco, College of Business, University of Texas at San Antonio.
    7. Joseph H. Haslag & Scott E. Hein, 1995. "Measuring the policy effects of changes in reserve requirement ratios," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 2-15.
    8. Joseph H. Haslag, 1995. "Inflation and intermediation in a model with endogenous growth," Working Papers 9502, Federal Reserve Bank of Dallas.
    9. Corrado, Luisa & Schuler, Tobias, 2017. "Interbank market failure and macro-prudential policies," Journal of Financial Stability, Elsevier, vol. 33(C), pages 133-149.
    10. Powers, Dennis, 2005. "Inside money and the effects of inflation," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 494-516, September.
    11. Cuberes, David & Dougan, William, 2009. "How Endogenous Is Money? Evidence from a New Microeconomic Estimate," MPRA Paper 17744, University Library of Munich, Germany.
    12. Jia, Pengfei, 2020. "Negative Interest Rates on Central Bank Digital Currency," MPRA Paper 103828, University Library of Munich, Germany.
    13. Reed, Robert R. & Ghossoub, Edgar A., 2012. "The effects of monetary policy at different stages of economic development," Economics Letters, Elsevier, vol. 117(1), pages 138-141.
    14. Raghbendra Jha & Deba Prasad Rath, 2001. "On the Endogeneity of the Money Multiplier in India," ASARC Working Papers 2001-12, The Australian National University, Australia South Asia Research Centre.
    15. Gauger, Jean, 1998. "Economic Impacts on the Money Supply Process," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 553-577, July.
    16. Sustek, Roman, 2010. "Monetary aggregates and the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 451-465, May.
    17. Jia, Pengfei, 2021. "Trust Shocks, Financial Crises, and Money," MPRA Paper 106343, University Library of Munich, Germany.
    18. Peter Ireland, 2005. "EconomicDynamics Interviews Peter Ireland on Money and the Business Cycle," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 7(1), November.
    19. Pedro J. Gutiérrez-Diez & Tibor Pál, 2023. "Monetary policy models: lessons from the Eurozone crisis," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-19, December.
    20. Su-Ling TSAI & Tsangyao CHANG, 2018. "The Comovment between Money and Economic Growth in 15 Asia-Pacific Countries: Wavelet Coherency Analysis in Time-Frequency Domain," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 63-79, December.
    21. Boerner, Lars Michael & Ritschl, Albrecht, 2010. "Communal responsibility and the coexistence of money and credit under anonymous matching," Economic History Working Papers 121709, London School of Economics and Political Science, Department of Economic History.
    22. Joseph H. Haslag, 1997. "Output, growth, welfare, and inflation: a survey," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 11-21.
    23. Burton Abrams & Russell Settle, 2005. "Is Money Neutral in the Long Run?," Working Papers 05-04, University of Delaware, Department of Economics.
    24. Daniel Murphy & Eric Young, 2020. "Government Debt Limits and Stabilization Policy," Working Papers 20-23, Federal Reserve Bank of Cleveland.
    25. Finn, Mary G., 1999. "An equilibrium theory of nominal and real exchange rate comovement," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 453-475, December.

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