Money and Economic Activity in Developing Countries: Evidence Based on Cointegration and Causality Tests

Abstract

This paper examines whether or not the fluctuations in monetary and credit aggregates contain useful information about subsequent future movements in nominal or real income in 10 developing countries. Using annual data covering the 1960–1990 period, empirical results showed that narrow (Ml) and broad (M2) monetary aggregates as well as domestic credit (DCR) contain statistically significant information about future movements in nominal income in some of the developing countries examined, while either M1 or M2 or DCR does in some other countries. However, when nominal income is decomposed into its real income and price components, the results suggest that these aggregates contained no statistically significant information about future movements in real income in nearly all the developing countries in the sample.