Do Financial Aggregates Lead Activity?: A Preliminary Analysis

It is frequently argued that an increase in the rate of growth of money or credit will lead to an increase in economic activity. This paper addresses this issue by looking at the lead/lag relationship between a range of financial aggregates and several measures of economic activity for Australia over the past decade. The paper concludes, on the basis of a range of tests, that monetary and credit aggregates tend to lag, or at best move contemporaneously with, economic activity. There is very little evidence that changes in the trend of money and credit portend future changes in economic activity.