| dc.description.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.
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