Friday, November 15, 2013

Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008

Dear Readers,

Let me start off by sincerely apologizing for my abrupt and now lengthy absence from the blogosphere. Although I have been absent from blogging, my interest in the endogenous money hypothesis and Modern Monetary Theory (MMT) continues to grow.

This semester I have been taking a directed readings course on those topics with another GMU PhD student, Paul Mueller. As part of the course, we are co-writing two papers that will hopefully be published in an academic journal. Our first paper, “Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008,” is now sufficiently complete to make publicly available.

The unique aspects of our paper are the incorporation of Divisia monetary aggregates and a focus on broader measures of the money supply (i.e. M3 and M4). While the paper remains in draft status (so please do not cite this version), we would greatly appreciate comments and suggestions for improving the paper before a final draft is submitted for publication. The paper can be downloaded at SSRN (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178). Here is the abstract:

“This paper demonstrates that contrary to orthodox monetary theory, fluctuations in total commercial bank loans affect the quantity of various money aggregates, including the monetary base, but not vice versa. The Granger causality tests that we run on lagged quarterly data strongly suggest that changes in the money supply depend on private demand for commercial loans, not “exogenous” changes in the monetary base. Our findings strongly contradict the notion of a fixed “money multiplier.” The theory behind endogenous money is that banks issue new loans (credit) on demand and look for reserves later. The Federal Reserve must ultimately accommodate increases in demand for reserves from the banking sector to maintain an interest rate target and, more importantly, financial stability. These findings suggest that most economists need to revise their theories about monetary policy and credit expansion.”


Thank you in advance for taking the time to help and for continuing to follow my blog. 

(Note: In the past couple days it has come to my attention that using Granger-causality tests on the first differences of variables may lead to invalid results. Apparently a separate technique, created by Toda and Yamamato, generates more valid results using extra lags of the variables in levels as exogenous variables in the regression. The preliminary results using this method don’t materially alter the paper’s conclusion. Since each technique has been used in recently published articles, we would appreciate insight from other economists on which method (or both) to include our final version.) 

65 comments:

  1. Fantastic. Seems to me this area of economics could use much more empirical and quantitative support.

    ReplyDelete
  2. Very interesting stuff Josh and just what we need right now.

    http://diaryofarepublicanhater.blogspot.com/2013/11/cullen-roche-on-qe-joshua-wojinlower.html

    ReplyDelete
  3. Don't worry, Mark Sadowski will come up with some carefully cherry-picked data which he will transform in just the right way using some obscure technique to demonstrate that in fact everything you say is wrong and everything he says is right.

    ReplyDelete
    Replies
    1. You know it Anon but it's ok I'm expecting him.

      Delete
    2. Wojinlower's paper on endogenous money and the money supply a must read http://diaryofarepublicanhater.blogspot.com/2013/11/right-away-i-love-joshua-wojinlowers.html

      Delete
    3. Wasn't it Mark Sadowski who brought it to Joshua's attention that using Granger-causality tests on the first differences of variables may lead to invalid results? And from whom did he learn about the Toda and Yamamato technique?

      Delete
    4. ATR and Mike - Thanks for the support!

      Anon - You are certainly free to your opinion but so far Mark has provided thoughtful commentary and been willing to engage in productive dialogue.

      Mark - Yes you were on both accounts. If we end up going that direction I will definitely make your help publicly known. We left the T-Y technique out of the current paper to see whether or not people make the critique you note. We're also seeking guidance on that topic from GMU professors that are more familiar with econometrics.

      Delete
  4. "Our findings strongly contradict the notion of a fixed “money multiplier.”"

    That's good, because so does empirical reality:

    http://research.stlouisfed.org/fred2/graph/?graph_id=123223&category_id=0

    Every Econ 102 textbook I've ever seen teaches the money multiplier is a function of three variables. The currency ratio is always portrayed as the depositors' choice, the reserve ratio (above required, if any) is always the lenders' choice, and the total amount of currency and reserves (the monetary base) is the central bank's choice (even if supplied through the discount window), and all are dependent on the conduct of monetary policy by the central bank.

    "Yet, according to orthodox monetary theory, the massive expansion of the monetary base should have done far more than stabilize the price level. It should have led to a significant increase in the price level (Meltzer 2013)."

    Alan Meltzer's recent statements concerning contemporary US monetary policy severely contradict much of what he has written about the Great Depression. And I seriously doubt that the period in question (1971-2008) is relevant to our current circumstances.

    Also, from my brief skimming of your paper I see almost no discussion of the work monetary economists have done (e.g. Sims, Bernanke/Blinder, Christiano/Eichenbaum/Evans etc.) since Friedman and Schwartz published their monetary history half a century ago. In my opinion you are unfairly characterizing what most modern monetary economists actually believe.

    Nevertheless, good luck with getting the paper published. I'm certain that the Journal of Post Keynesian Economics will love it.

    ReplyDelete
    Replies
    1. Mark,

      Thank you for taking the time to skim the paper and provide feedback.

      I can't speculate on Econ 102 textbooks, but my personal experience at the graduate level (both from classes and conferences) suggests that the "money multiplier" is not only still taught but often presumed to hold within broader macro models. Given that, it is worth repeating the finding until a larger consensus is reached.

      Perhaps our paper is not clear enough on the distinction between exogeneity in the sense of direct control or statistics (or I misread your comment). We don't deny the central bank can directly control the quantity of base money, however we do disagree that base money is exogenous in the statistical sense. I completely agree that this finding is dependent on the central bank's conduct and does not accurately depict the current environment.

      You may be correct that we are unfairly characterizing modern monetary economists and I will consider expanding that discussion. I recognize that New Keynesians, for example, basically exclude money from their models and rely on a central bank that targets short-term interest rates. Our paper is not especially intended to undermine these recent views, but rather deal with the fact (mentioned earlier) that many economists still learn that the Fed normally affects NGDP/inflation/unemployment by exogenously adjusting the broad money supply through the monetary base. If we agree that is has not done so for most of its history, that's wonderful. In that case, maybe the used of Divisia monetary aggregates and broader money supply measures will provide further evidence.

      Thanks again for the comments and I appreciate any further comments you have now or in the future.

      Delete
    2. Joshua,
      I've had a chance to go through your results and compare them with my notes and my own results and so I have a question and some further comments which I hope you find helpful.

      1) When you say "commercial bank loans" are you referring to "commercial bank loans and leases" or some other measure? (You may want to make this more specific.)

      2) The only published paper with Granger causality results on the US monetary base, commercial bank loans and money supply that I am aware of is Palley (1994). Palley uses monthly data from January 1973 through June 1990 and looks at two measures of commercial bank loans: 1) commercial bank loans and leases and 2) commercial bank loans and securities. He finds that the monetary base Granger causes commercial bank loans (both measures). He then uses this fact to argue that the evidence supports Structural Endogeneity over Accomodationist Endogeneity. This finding also contradicts one of your results.

      When I tried to reproduce Palley's results, using monthly data over the same time period as Palley, like you I found that commercial bank loans (both measures) Granger cause the monetary base. There are a few possibilities why Palley's results are different from mine. First, he uses differenced data, whereas I did my tests in levels. Second, his data comes from CITIBASE, whereas mine comes from FRED. I've checked and there are in fact slight differences in the data. Finally, there is the remote possibility that I am mischaracterizing Palley's results because I'm going by an earlier draft of his paper, as I do not have a copy of the final published version.

      3) I find that there is bidirectional Granger causality between the monetary base and NGDP at the 1% significance level over the period 1959Q1 through 2013Q2. This is the only one of my personal results which contradicts yours. Two possible explanations for our different results are: 1) I did my tests in levels and not differences, and 2) We are using different time periods.

      And one minor editing point. In the conclusion you say:

      "On this count, empirical evidence is presently limited to a handful of studies covering select developed countries."

      One of the studies you list looks at Malaysia, which is usually characterized as a developing country.

      Thanks,
      Mark

      Delete
    3. Mark,
      Thank you for continuing to offer helpful comments.

      1) We are referring to commercial bank loans and leases (from FRED). I had questioned whether or not to make that more explicit, so I appreciate the input.

      2) One of the inspirations for the paper was simply the sparse amount of empirical evidence in the academic literature and lack of updates in nearly 20 years.

      3) I'll have to review my notes on the tests in levels I ran the other night, but I thought that result was unchanged. Even if the difference is merely due to time, it's an interesting point for future consideration.

      Lastly, good catch on the incorrect designation of Malaysia.

      Thanks again.

      Delete
  5. Joshua,

    This is a great initiative. I agree with your point 2 above that it's a good time for an update. I just want to add to Mark's comment that you may wish to check out Eichenbaum and Singleton (1986). There is an interesting result on page 133. The money supply appears to Granger cause real output during the Fed's "monetarist" experiment. The contention is that money may have been in some sense more exogenous during the period when the Fed switch to a nonborrowed reserves operating policy instrument. For this reason, it may be worth considering the results in light of changes in the Fed's policy regime. As hinted above by Mark, the December 2008 changes also alter system dynamics.

    http://www.nber.org/chapters/c4246.pdf

    Check out also the comment on p.144 by G. Mankiw (who I find has a very good grasp of methodological aspects, notwithstanding his politics and other policy preferences).

    ReplyDelete
    Replies
    1. Circuit,

      My apologies for not replying sooner. Thank you very much for the comments and suggested reading. I'm presently working on revising the paper and hopefully will have a much improved version available within the next few weeks.

      Thanks again.

      Delete
  6. Have to look at the paper.

    However IMO, the sharp dividing point 1971 is unnecessary. I will leave you will all sorts of contradictions.

    ReplyDelete
    Replies
    1. Sorry second line should read:

      "It will leave you will all sorts of contradictions."

      Delete
    2. Ramanan,

      Did you already download the revised version? Due to a potential conflict with the publishing journal we had to remove the paper from SSRN, at least temporarily.

      I appreciate your comment regarding the date choice. To clarify, data from the Center for Financial Stability only begins in 1967, so for the purposes of this study we could not have gone back much further. I recognize that the central bank was acting in an accommodating manner prior to the official close of the gold window, but thought using a more defined institutional setting might eliminate some questions.

      Anyways, your comments (and blog) are always appreciated.

      Delete
    3. I am a bit confused. Get the error message for the two links.

      Delete
  7. I must say you had done a tremendous job,I appreciate all your efforts.Thanks alot for your writings......
    Packers And Movers Chennai

    ReplyDelete
  8. Spot on with this write-up, I absolutely believe this website needs a lot more attention. I'll probably be
    back again to read through more, thanks for the information!

    ReplyDelete
  9. Packers And Movers Hyderabad Local Household Shifting Service, Get Free Best Price Quotes Local Packers and Movers in Hyderabad List, Compare Charges, Save Money And Time @ Packers And Movers Hyderabad

    ReplyDelete
  10. We Provide List Of Best And Affordable 100% Safe Packers And Movers Bangalore For Local Shifting. Professional, Trusted And Verified Movers And Packers With Price List.
    Packers And Movers Bangalore

    ReplyDelete
  11. Packers and Movers Chennai Give Safe and Reliable ***Household Shifting Services in Chennai with Reasonable ###Packers and Movers Price Quotation. We Provide Household Shifting, Office Relocation, ✔✔✔Local and Domestic Transportation Services, Affordable and Reliable Shifting Service Charges @
    Packers And Movers in Chennai

    ReplyDelete
  12. Right off the bat check, the Error shows up with just the Retry or Cancel catches. On the off chance that it shows up with Retry or Cancel, select to Retry Button one time. On the off chance that this does not enable the procedure to proceed with click Cancel Button. After drop the procedure, take after these means to determine this Quickbooks POS Error 1328. May be the initial step settle your issue or you may need to attempt every one of the three.

    ReplyDelete
  13. We help and give the arrangement your concern in a split second. The Quickbooks Enterprise sales Phone Number 1888-557-6950 QuickBooks have helped issue when it come while utilizing the Accounting programming. We have stopped experienced and confirmed expert who can encourage support and help you and resolve the issue of quickbook enterprise.

    ReplyDelete
  14. The Product exhibits both your adjustment and release in the upper left corner. Shockingly, Intuit's information on this mix-up is completely lacking. Contact QuickBooks Support Number in the event that amid including or erasing any section into check enroll client gets QuickBooks Error Code C=224.

    ReplyDelete
  15. This comment has been removed by the author.

    ReplyDelete
  16. Norton antivirus is probably essentially the most broadly utilized antivirus program system process. Norton Antivirus is usually a structured title with your complete Norton Antivirus corporation that may be extra details popular amid the read through more shopper. get more info it's quite a few abilities contain virus protection, firewall, security from effected Internet contents and e-mail filtering and distant administration techniques. From the occasion, you stumble upon some faults dial Norton Antivirus Customer Service Helpline Number which allows you to unravel your inquiries. Visit Here: https://www.ihelplinenumber.com/Norton-Antivirus-Customer-Support/

    ReplyDelete
  17. It might transpire to all individuals even supposing concentrating on a broad application package, by the use of example, Intuit QuickBooks accounting Laptop software. Consumers could facial location troubles, as well as This technique system can see an aggravating notion like "Domestic Dwelling windows is seeking a solution" or Laptop computer program plan give has stopped." for anyone glitches, It really is acquired QuickBooks Customer Service Phone Number which provides suitable guidelines of accounting spot gurus down below with the instantaneous Response. If you've any query dial QuickBooks customer support phone number which could assist you to get much more details to take care of your concerns. Visit Here: https://quickbookssupportphonenumbers.us/

    ReplyDelete
  18. QuickBooks for modest organization’s Laptop computer or Pc software present coupled Along with the QuickBooks Helpline it should really help support to preserve time function and manufactured issues speedily. Only accounting application gives which does which sustains current problems with firms.

    ReplyDelete
  19. The Apple iPhone phone number professional has effectively properly trained practitioner that remedy any problems pertaining to Apple Goods. From the occasion, you don't want to phone apple iphone support number and want to help and looking for assistance with 3rd party help provider. Then get in touch with our toll-no cost sum which is mention on the website that's let you Call into the 3rd party services company in which you get the proper help and a spotlight from nicely skilled apple phone number customer service. The benefits of working with third-party assistance and assistance provider that calling instantly into the iPhone customer here is that provider and aid are substantially less costly and the standard is a great deal superior.

    Read More: https://penzu.com/public/8840a2eb

    ReplyDelete
  20. The Apple Mobile and its company is just not some solitary offer. It really is a little bit iTunes. The iPhone help phone number that's a modern media participant approach. The iTunes permits you to absolutely accomplish improvement attribute of Apple participant and beautifully prepare just like a participant. That may be definitely launched independently by subsequent some advices of installments by Apple iPhone phone number group. That study course of motion is created via an iphone help phone number service Just click here toll-absolutely free volume that's officially accessibility by shopper get more info and receptive 24/seven by Apple specialized team. Visit Here: http://johnnytechshaw.blogmaster.net/post-at-apple-service-phone-number-you-receive-professional-help-with-590809.html

    ReplyDelete

  21. McAfee Associates, Inc. from 1987–2014 Associate in Nursing Intel Stability Team from 2014–2017) is doubtless a Yankee international pc protection pc computer code company headquartered in the urban center, California, and statements to become the earth's greatest centered safety technology firm. Mcafee Support for Antivirus this can be the most effective Antivirus together with your laptop.

    Visit Here: Support for Antivirus

    ReplyDelete
  22. While Mcafee removal Device is among the primary antivirus software program but it surely occasionally faces complex difficulties which could involve the inability of installation or un-installation in the software package. Though installation of Mcafee Antivirus is just not a complicated job and it basically is often mounted by downloading or in the CD but, Should you be struggling with problems in correct installations Then you can certainly get to out to our Mcafee Antivirus guidance for aid without any hesitations.
    Mcafee Support Number

    ReplyDelete
  23. An Exclusive beauty procedure for your personal stress filled daily life by your selection Heartily, a warm welcome to top-quality nationwide level esthetic most beautiful Bangalore Escorts expert services. Without a doubt, our Bangalore Escort Service, versions, volunteer beauty butterfly Girl angels are wonderful and they're elite to provide our VIPs, guests, and clients. How would you decide on your dream angels?. They are really classy, Unique, perfectly educated, properly tamed, shaped plus the healthiest desirable Wonderfully groomed Phone GIRLS. That is definitely us at most priority. You may immediately interact with your Bangalore Escort Service. Visit Here: https://tinyurl.com/ycpoapu3

    ReplyDelete
  24. AVG antivirus is remarkable among other featuring antivirus programming throughout the world. It offers to incorporate as much as an assurance to your Notebook/Notebook from bacterial infections. Inside the insurgency of Digital term, Every single 2nd individual is related with Net as it really is profiting by its offices like Banking, sharing within your images on informal Group Locations, sharing your crucial information by mail and significantly more. Usually, there are some unwanted individuals who endeavor to meddle between you and World wide web for their strengths called electronic offenders. Alongside these lines, we below at check here Djonsitehelp give amazing help to avg support phone number and unique infection or Computer system connected issues about the call or as a result of remote classes. Visit Here: https://bit.ly/2FzOmcm

    ReplyDelete
  25. Our Uttarakhand hill station Tour Packages also cater towards the Hindu pilgrims who request salvation in ‘Dev Bhoomi’. Our tastefully crafted Char Dham Yatra tour deals by highway and helicopter and also shorter do them and Uttarakhand Holiday Packages which might be all inclusive will take treatment of each of the requires in the pilgrims and enable them to journey into the four pious Hindu dreams of click here Yamunotri, Gangotri, Kedarnath and Badrinath to hunt salvation in the almighty. Visit Here: https://bit.ly/2FDoxY8

    ReplyDelete
  26. From time to time arranging a visit is as pleasurable as possessing a relations getaway. But every now and then you wish to another human being to try to do Each and every person Amongst the listing or provide you with the outcomes you'd like and just tutorial a pay a visit to bundle. get a great deal extra details To the rationale that, let's face it, sorting read more by motels, itineraries, and flights is usually a horrifying process everytime you merely Himachal Pradesh Tour Packages to obtain absent. Also, it really is possible to usually get hold of a lot better specials in the event you guide a proposal right here you attain Honeymoon Tour Deals, Rajasthan Tour Packages and Similarly Uttarakhand Tour Offer and even more. Visit Here: https://tinyurl.com/yakrwbo5

    ReplyDelete
  27. We ensure that our staff’s makes a client feel at home and in the friendliest way. We have trained our staff in a way that they make you feel as a friend so that you can indulge in your dark fantasies in the best possible way

    Escorts in Gurgaon
    Gurgaon Escorts
    Escorts service in Gurgaon

    ReplyDelete
  28. Hiring packers and movers in Gurgaon is not too hard if you take help of the best moving professionals. Best movers and packers Gurgaon assist with their skilled and trained team to pack, load, unload and unpack your belongings.
    So be aware and hire the best mover packer to save your valuables.
    packers and movers Gurgaon
    packers and movers Gurgaon Charges

    ReplyDelete
  29. Packers and Movers in Delhi The Air cargo Packers & Logistics was incorporated to offer remarkable services to its reputable clients. Capitalizing on our experience and expertise in the field of packaging and unloading , we are providing our specialized services across India and that's why you will face no problem with our services.

    ReplyDelete
  30. QuickBooks payroll support Phone Number
    QuickBooks payroll support Number
    QuickBooks payroll tech support Number
    QuickBooks payroll support Phone Number
    QuickBooks payroll support Number
    QuickBooks payroll tech support Number
    QuickBooks Payroll support can be availed by dialing QuickBooks payroll Technical support phone number +1-855-548-3394. QuickBooks Payroll support simplifies business and reduces customer’s efforts by giving away knowledgeable information or technical assistance via remote desktop support.

    ReplyDelete
  31. Packers and Movers Gurgaon Provide Reliable, Safe and Certified Service Provider list, Get Free ***Best Price Quotaition and Compare Charges. ???Hassle free Household Shifting Services, High Quality packing Material, Office Relocation, Car Transportaion, ###Local and Domestic Shifting Service @
    Packers And Movers Gurgaon

    ReplyDelete
  32. Packers and Movers Bangalore as a Services providing company can make all the difference to your ###Home Relocation experience. Bangalore based Company which offers versatile solutions, Right team that easily reduce the stress associated with a ✔✔✔Household Shifting, ***Vehicle Transportation. we help things run smoothly and reduce breakages and offer you seamless, Affordable, Reliable Shifting Services, Compare Shifting Charges @ Packers And Movers Bangalore

    ReplyDelete
  33. Get Shifting/Relocation Quotation from ###Packers and Movers Delhi. Packers and Movers Delhi 100% Affordable and Reliable ***Household Shifting Services. Compare Transportation Charges and Save Time, Verified and Trusted Packers and Movers in Delhi, Cheap and Safe Local, Domestic House Shifting @
    Packers and Movers Delhi

    ReplyDelete
  34. Packers and Movers Ahmedabad - We Provide ***Best Service Providers, Safe, Reliable, Affordable, Trusted ###Movers and Packers in Ahmedabad List, Household Shifting, Office Relocation: Choose Top Verified Packers and Movers Ahmedabad Compare ✔✔✔Shifting Service Chrages, Price Quotation, Rate List Charts and Save Money and Time @ Packers And Movers Ahmedabad

    ReplyDelete