Money, income, and exchange rate regimes: Evidence from the U.K.

Abstract

This study examines the money-income correlation in the U.K. using monthly data over both fixed and flexible exchange rate regimes. Most previous studies find unidirectional causality running from income to money. The results presented here indicate that money and income are independent over the fixed rate period, while unidirectional causality runs from money to income over the flexible rate period. There are two major reasons for the difference between the results reported here and those provided by other studies. First, unlike the current study, previous studies employing U.K. data have tested for Granger causality using bivariate or trivariate tests which suffer from an omitted variables bias. Second, unlike many previous studies, the current study does not mix data from different exchange rate regimes.