A Multivariate Spectral Analysis of the Supply of Money and Credit

Abstract

MOVEMENTS IN MONEY AND INCOME are closely correlated. There is general agreement that this correlation is the result of a fundamental economic relation between tlle monetary sector and the sector, but there is not agreement on the nature of this relation. It may be that income is the major determinant of the supply of money and that the observed correlation is a result of the sector's inRuence on money. Alternately, the arguments of the money-supply function may be independent of the sector, and the money supply may be an essentially exogenous variable which influences the sector. Economists have advanced a number of hypotheses about the nature of this relation between the monetary sector and the sector. Monetary economists studying the institutional arrangements and behavior of the Federal Reserve Board have concluded that as a result of board policy the money supply is most accurately characterized as an endogenously determined variable dependent on the sector. They note, that early board policy was dominated by the real bills doctrine, subject to a gold constraint, and by the desire to accommodate the sector by providing an elastic currency.1 Subsequent board policy has emphasized controlling the sector fluctuation, or leaning against the wind, via control of the credit markets with free reserves and interest rates as