Empirical Identification of the Vector Autoregression: The Causes and Effects of U.S. M2

Thumbnail Image



Journal Title

Journal ISSN

Volume Title

Repository Usage Stats



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.








Kevin Douglas Hoover

Professor of Economics

Professor Hoover's research interests include macroeconomics, monetary economics, the history of economics, and the philosophy and methodology of empirical economics. His recent work in economics has focused on the application of causal search methodologies for structural vector autoregression, the history of microfoundational programs in macroeconomics, and Roy Harrod's early work on dynamic macroeconomics. In philosophy, he has concentrated on issues related to causality, especially in economics, and on reductionism -- the philosophical counterpart to microfoundations. Recent publications include:

  • "Trygve Haavelmo's Experimental Methodology and Scenario Analysis in a Cointegrated Vector Autoregression" (Econometric Theory, 2015), 
  • "Reductionism in Economics:  Intentionality and Eschatological Justification in the Microfoundations of Macroeconomics" (Philosophy of Science 2015), 
  • "Mathematical Economics Comes to America:  Charles S. Peirce’s Engagement with Cournot’s Recherches sur les Principes Mathematiques de la Théorie des Richesses" (Journal of the History of Economic Thought, 2015), 
  • "The Genesis of Samuelson and Solow’s Price-Inflation Phillips Curve" (History of Economics Review, 2015), 
  • "Solow's Harrod: Transforming Cyclical Dynamics into a Model of Long-run Growth" (European Journal of the History of Economic Thought 2015), 
  • "In the Kingdom of Solovia:  The Rise of Growth Economics at MIT, 1956-1970" (History of Political Economy 2014), 
  • “Still Puzzling: Evaluating the Price Puzzle in an Empirically Identified Structural Vector Autoregression” (Empirical Economics, 2014),
  • "On the Reception of Haavelmo's Econometric Thought" (Journal of the History of Economic Thought, 2014) – winner of the History of Economics Society Best Paper Award in 2015.  

Unless otherwise indicated, scholarly articles published by Duke faculty members are made available here with a CC-BY-NC (Creative Commons Attribution Non-Commercial) license, as enabled by the Duke Open Access Policy. If you wish to use the materials in ways not already permitted under CC-BY-NC, please consult the copyright owner. Other materials are made available here through the author’s grant of a non-exclusive license to make their work openly accessible.