Money growth,uncertainty and macroeconomic activity: a multivariate GARCH analysis |
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Authors: | David Cronin Robert Kelly Bernard Kennedy |
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Institution: | (1) Central Bank and Financial Services Authority of Ireland, Dame Street, Dublin, 2, Ireland |
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Abstract: | The impact uncertainty has on money growth has received much attention in recent years and is an issue of critical importance
to central banks, particularly for those, such as the European Central Bank (ECB), which place a strong emphasis on monetary
analysis in monetary policy formulation. Some recent papers examining this issue use ad hoc estimates and measure variability
rather than uncertainty. We employ a multivariate GARCH model, which measures uncertainty by the conditional variance of the
data series, to investigate whether macroeconomic uncertainty and monetary uncertainty Granger-cause changes in real money.
The estimated model also allows us to investigate how monetary uncertainty impacts economic activity. We find that macroeconomic
uncertainty impacts positively on US real M2 growth over a two-year horizon but that monetary uncertainty does not cause changes
in real M2. Instead, our results indicate that real money growth causes monetary uncertainty. Monetary uncertainty is found
to have a negative effect on real economic activity and on macroeconomic uncertainty. We conclude by discussing the implications
of these results and the methodological approach used for institutions such as the ECB that give monetary analysis a prominent
role in their monetary policy strategy. |
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Keywords: | |
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