Among the most stable phase relationships between economic variables is that between money, the change in money, and general economic activity. Both the change in money and money itself lead production over the business cycle. This relationship buttressed with results of the Granger/Sims test for causality, has been used to support the notion that money causes real activity. This notion, in turn, is used to argue both that monetary policy causes the business cycle and that monetary policy can ameliorate the business cycle. This paper examines a hypothesis for the phase relationships which assume that money does not cause real activity, but, rather, real activity causes money. According to the hypothesis inventory assessment, which leads business activity, induces corporate borrowing, which in turn causes a money expansion with a lead similar to that observed. This has been a working hypothesis for the phasing in money of the System Dynamics National Model project. It is concluded that the hypothesis, by itself, is insufficient to account for the observed timing relationships. However, the inventory investment hypothesis combined with additional hypotheses such as a mechanism for household portfolio adjustment, can account for the phasing. These results do not depend on a causal flow from money to real activity. As a consequence, business cycle phase relationships should not be taken to imply money causes the business cycle nor that monetary policy can influence the business cycle.

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Date created

• 1983

Type

• Document

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• Processing documentation available at: https://wiki.albany.edu/display/SCA/Processing+Ingested+Digital+Files

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• Creative Commons BY-NC-ND Attribution-NonCommercial-NoDerivs 4.0 International

  
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ITEM CONTEXT

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b0aa2a699b54f0d19f6a9d93bdbcfa18

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cf82ceba47eedd73f41b00918de16477

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Part of

23d738ba88f8333bc39725f9cb5bd0b8

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Collection

System Dynamic Society Records

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Collecting area

• This collection is part of the University Archives