The Correlation Between Money and Output in the United Kingdom: Resolution of a Puzzle

This paper proposes a resolution to the puzzle

Edward Nelson


Scholarcy highlights

  • Bernanke observed, “it should be unnecessary to motivate a study of the statistical correlation between the money stock and national income
  • The prominent place given in economic research to the correlation of money and income—where the latter refers to aggregate real national income or output—was recognized by King, who noted that “since the work of Friedman and Schwartz, most economists view cyclical variations in money as positively associated with cyclical variations in real activity.”
  • The recent U.K. recession, in which negative output growth was accompanied by weak money growth, seems to have pushed up the signal-to-noise ratio in the monetary aggregate used here
  • The United Kingdom evidence provided some challenges to this perspective, with the money/output correlation seemingly absent and even the interwar period—which is often cited as a case study in demonstrating the importance of monetary policy actions for short-run output behavior—appears to generate patterns of real and nominal interaction that supported stories based on instantaneous neutrality of money
  • Examination of the 1873 1975 period covered by Friedman and Schwartz as well as the 35 years of data after 1975 led to the uncovering of a familiar positive money/output correlation
  • Once these events are isolated, the positive money/output correlation that tends to emerge from short-run monetary neutrality can be discerned from U.K. historical data

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