Money-output Causality Revisited – A Bayesian Logistic Smooth Transition VECM Perspective


  • The author is indebted to Gary Koop, Anders Rahbek and two anonymous referees for a number of constructive suggestions. The author would also like to thank Christopher Bowdler, Stephen Hall, Roberto Leon-Gonzalez, Roderick McCrorie, Emi Mise, Rodney Strachan and Jim Taylor for helpful comments. Any remaining errors are the author's responsibility. Financial support from the Department of Economics, University of Leicester is gratefully acknowledged.


This article proposes a Bayesian approach to examining money-output causality within the context of a logistic smooth transition vector error correction model. Our empirical results provide substantial evidence that the postwar US money-output relationship is nonlinear, with regime changes mainly governed by the output growth and price levels. Furthermore, we obtain strong support for nonlinear Granger causality from money to output, although there is also some evidence for models indicating that money is not Granger causal or long-run causal to output.