Empirical Identification of the Vector Autoregression: The Causes and Effects of U.S. M2

27 Pages Posted: 4 Jun 2008 Last revised: 26 Feb 2009

See all articles by Kevin D. Hoover

Kevin D. Hoover

Duke University - Departments of Economics and Philosophy

Selva Demiralp

Koc University - Department of Economics

Stephen J. Perez

California State University, Sacramento - Department of Economics

Date Written: February 1, 2008

Abstract

The M2 monetary aggregate is monitored by the Federal Reserve, using a broad brush theoretical analysis and an informal empirical analysis. This paper illustrates empirical identification of an eleven-variable system, in which M2 and the factors that the Fed regards as causes and effects are captured in a vector autogregression. Taking account of cointegration, the methodology combines recent developments in graph-theoretical causal search algorithms with a general-to-specific search algorithm to identify a fully specified structural vector autoregression (SVAR). The SVAR is used to examine the causes and effects of M2 in a variety of ways. We conclude that, while the Fed has rightly identified a number of special factors that influence M2 and while M2 detectably affects other important variables, there is 1) little support for the core quantity-theoretic approach to M2 used by the Fed; and 2) M2 is a trivial linkage in the transmission mechanism from monetary policy to real output and inflation.

Keywords: M2, monetary aggregates, causality, causal analysis, graph theory, monetary policy, quantity theory of money, PcGets, Autometrics, search algorithms

JEL Classification: B41, C32, C42, E51, E52, E58

Suggested Citation

Hoover, Kevin D. and Demiralp, Selva and Perez, Stephen J., Empirical Identification of the Vector Autoregression: The Causes and Effects of U.S. M2 (February 1, 2008). Economics Research Initiatives at Duke Working Paper No. 19, Available at SSRN: https://ssrn.com/abstract=1091249 or http://dx.doi.org/10.2139/ssrn.1091249

Kevin D. Hoover (Contact Author)

Duke University - Departments of Economics and Philosophy ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Selva Demiralp

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Stephen J. Perez

California State University, Sacramento - Department of Economics ( email )

6000 J Street
Sacramento, CA 95819-6082
United States
916-278-6919 (Phone)
916-278-5768 (Fax)

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