Money, Income, and Causality in the United Kingdom: An Empirical Reexamination

Abstract

SINCE THE REDUCED-FORM ECONOMETRIC EXERCISES of Friedman and Meiselman [2], considerable research has been undertaken to determine nature of relationship running from money to income as well as importance of causation from income to money. Using an empirically testable defintion of causality proposed by Granger [4], Sims [7] developed an econometric technique to test for unidirectional causality in a two-variable system. In an application to U.S. nominal GNP and money data from 1949.III to 1968.IV, he reported that the main empirical finding is that hypothesis that causality is unidirectional from money to income agrees with postwar U.S. data, whereas hypothesis that causality is unidirectional from income to money is rejected [7, p. 540]. To examine generality of Sims's results, Williams, Goodhart, and Gowland [8] (W-G-G) undertook a similar study using U.K. data from 1958.I to 1971.III, a period when Bretton Woods fixed exchange rate system prevailed. They found that neither causal relationship from money to income nor reverse causality from

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