Co-integrated money in the production function–evidence and implications

Abstract

The notion of money as a factor of production has been debated both theoretically and empirically by a number of researchers in the past four decades. However, the empirical support for money as an input along with labour and capital has been mixed and thus, the issue appears to be unsettled. Recent developments in econometrics regarding co-integration and error correction provide a rich environment in which the role of money in the production function can be reexamined. In a co-integrated space, this article presents empirical evidence indicating that different definitions of money (simple sum or the divisia M2) play an input role in the Cobb–Douglas production function.

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