Money, Credit and Nonfinancial Economic Activity: An Empirical Study of Five Countries

Data for five major industrialized economies show that the relationship between credit and nonfinancial economic activity exhibits stability comparable to that of the relationship between money and economic activity. Specific orderings among a narrow monetary aggregate, a broad monetary aggregate and a credit aggregate differ depending upon the stability criterion being applied and the country under study. On balance, credit exhibits the most stable contemporaneous relationship among the three aggregates, while the narrow money stock exhibits the most stable dynamic relationship with credit in second place and the broad money stock third. Further tests for the same five economies also show that, within the total of nonfinancial debt comprising the aggregate, the respective publicand private debt components exhibit movements over time that offset one another, and hence act to maintain the stability of total credit in relation to economic activity. Finally, additional tests for these five economies do not support the notion that the comparability of the respective relationships of credit and money to nonfinancial economic activity is due to any straightforward process whereby "money causes income and income causes credit." The interrelationships among money, credit, real income and prices in each economy are too complex to admit of any such simple interpretation.