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Money, output, and prices: 1967-2022

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  • Horan, Patrick J.

Abstract

This paper assesses the performance of Divisia and simple-sum monetary aggregates in explaining changes in key macroeconomic variables in the United States from 1967 to 2022. In the spirit of Friedman and Schwartz, I extract the cyclical components of money, output, and prices and find that money generally leads the latter two variables. Next, I test for Granger causality from monetary aggregates to several measures of real activity. Then, I estimate a more comprehensive VAR consisting of several real and nominal variables. Consistent with previous research, Divisia aggregates outperform their simple-sum counterparts. While the narrower aggregates exhibit a close relationship with output and prices in the earlier years of the sample, the broader aggregates outperform the narrow aggregates over the entire period. This reflects an evolution of the monetary system in which assets included in the broad aggregates have become increasingly important. Finally, I use counterfactual forecasts to find that broad Divisia money played an important role in explaining the severity of the Great Recession and the high inflation of 2021 and 2022.

Suggested Citation

  • Horan, Patrick J., 2024. "Money, output, and prices: 1967-2022," The Quarterly Review of Economics and Finance, Elsevier, vol. 97(C).
  • Handle: RePEc:eee:quaeco:v:97:y:2024:i:c:s1062976924000760
    DOI: 10.1016/j.qref.2024.101870
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    More about this item

    Keywords

    Money and business cycles; Divisia monetary aggregates; Business cycles; Vector autoregression;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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