Abstract
The well-established covariation between money and business activity is traditionally explained by causal influences in both directions. But recent theories of “real business cycles” attribute the covariation entirely to the one-way influence of activity on an endogenous money supply. Although some statistical “causality tests” find an exogenous monetary effect, it appears to be quite small. A different kind of test is presented here that distinguishes the endogenous (inside) and exogenous (outside) components of money, and finds their effects to be roughly equal. Both components of money appear to act in the traditional way as a combined unit in affecting activity.
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