A causal caveat in the Australian money/income relation

Abstract

The nature of Australian causal relations between money and nominal income and money and real income is examined. Like other recent studies in the area causality is in the sense of Granger (1969). Unlike other studies, causality conclusions are based on both a within-and post-sample analysis. This is motivated by Granger's(1980) recent suggestions regarding causality detection. Monetary growth is found to lead both real and nominal income growth by six months. Surprisingly, the post-sample forecasting analysis suggests real income rather than nominal income as the more relevant causal variable as far as monetary growth is concerned. The identified lag here is fifteen months.