NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Interpreting Evidence on Money-Income Causality

James H. Stock, Mark W. Watson

NBER Working Paper No. 2228
Issued in April 1987
NBER Program(s):Monetary Economics

Previous authors have reached puzzlingly different conclusions about the usefulness of money for forecasting real output based on closely related regression-based tests. An examination of this and additional new evidence reveals that innovations in M1 have statistically significant marginal predictive value for industrial production, both in a bivariate model and in a multivariate setting including a price index and an interest rate. This conclusion follows from focusing on the trend properties of the data, both stochastic and deterministic, and from drawing inferences using asymptotic theory that explicitly addresses the implications of these trends for the distributions of the various test statistics.

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Document Object Identifier (DOI): 10.3386/w2228

Published: Journal of Econometrics, Vol. 40, No. 1, pp. 161-182, January 1989.

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