Keywords: Money, M2, macroeconometric model, p-star
Abstract: With annual data, real M2 is shown to have a surprisingly strong
contemporaneous and leading relationship to GDP, that is robust to the inclusion of
other explanatory variables. When combined and tested with parsimonious error
correction equations for money demand, price determination, and a monetary
policy reaction function, an overall macroeconometric model is revealed with an
unusually good fit aside from a velocity shift adjustment needed for the early
1990s and better inflation performance than expected of late. A regime shift
is evident in the stronger response of the Federal Reserve to inflation in the
1980s than in the previous two decades.
Full paper (1586 KB PDF)
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Last update: January 27, 1998