Money and prices: U.S. Data 1869-1914 (A study with directed graphs)

This paper reconsiders empirical evidence on relationships among money, income, nominal prices, and wheat prices. Error correction and directed acyclic graphs are used to study both lagged and contemporaneous relations in late 19th and early 20th century U.S. data. We summarize evidence supporting the view that money was a causal actor in price movement in this period. In the long run (at a five year horizon), over twenty percent of the movement in price is explained by earlier movements in money supply; whereas, wheat price accounts for less than ten percent of this movement. There is also evidence that money supply was not exogenous, as it was determined, in contemporaneous time, by movements in the general price level and income. About forty percent of the variation in money is explained by current or lagged prices and income. There remains considerable uncertainty with respect to role of wheat prices in this period. Innovations in wheat price explain over twenty five percent of the uncertainty in real income at the five year forecast horizon - suggesting wheat price as either causal or proxying for more fundamental causal forces in the U.S. economy over our period of analysis.