The Influence of Unanticipated Money Growth on Real Output: Some Cross-Country Estimates

Abstract

Two MAJOR PROPOSITIONS can be deduced from the theories of the business cycle developed in [4, 14, 15, 161: (1) monetary growth affects real output only if it is unanticipated; (2) the impact on output of unanticipated monetary growth declines the more unpredictable monetary growth becomes. Proposition 1 has been tested on U.K. data in [2, 3S, on U.S. data in [5, 6, 7], and on Canadian data in [ 19] . The best-known but somewhat informal test of proposition 2 is contained in [15] on data from a cross section of eighteen countries.l In this paper we apply the method described in [3] to test proposition 1 using data from a range of countries. Furthermore we develop and discuss a formal method of testing proposition 2 and apply that method to the same data. Our main conclusion is that neither proposition can be decisively rejected.