Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 1985, Volume 53, Issue 1

Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data<129:MRIRAO>2.0.CO;2-Y
p. 129-156

Laurence Weiss, Robert B. Litterman

This paper reexamines U.S. postwar data to investigate if the observed comovements between money, interest rates, inflation, and output are compatible with the money to real interest to output links suggested by existing monetary theories of the business cycle, which include both Keynesian and equilibrium models. We find these theories are incompatible with the data, and in light of these results, we propose an alternative structural model which an account for the major dynamic interactions among the variables. This model has two central features: (i) output is unaffected by the money supply, and (ii) the money supply process is influenced by policies designed to achieve short-run price stability.

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