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The Methodology and Practice of EconometricsA Festschrift in Honour of David F. Hendry$
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Jennifer Castle and Neil Shephard

Print publication date: 2009

Print ISBN-13: 9780199237197

Published to Oxford Scholarship Online: September 2009

DOI: 10.1093/acprof:oso/9780199237197.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 27 November 2020

Empirical Identification of the Vector Autoregression: The Causes and Effects of US M2 *

Empirical Identification of the Vector Autoregression: The Causes and Effects of US M2 *

(p.37) 2 Empirical Identification of the Vector Autoregression: The Causes and Effects of US M2*
The Methodology and Practice of Econometrics

Kevin D. Hoover (Contributor Webpage)

Selva Demiralp

Stephen J. Perez

Oxford University Press

The M2 monetary aggregate is monitored by the Federal Reserve, using a broad brush theoretical analysis and an informal empirical analysis. This chapter 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 autoregression. 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. The chapter concludes 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.

Keywords:   M2, monetary aggregates, causality, causal analysis, graph theory, monetary policy, quantity theory of money, PcGets, Autometrics, search algorithms

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