Revisiting the Temporal Causality between Money and Income

The paper revisits the ever enduring question of whether â"money matters". The study uses the Sims' (1972) methodology over the quarterly time-series data spanning fifty years post World War II for the U.S. economy. The results indicate bi-directional causality between money and income. When we apply Granger Causality tests we find that income Granger causes money. The causality disappears when we add interest rates. Next when we use an Error Correction Model the results of the traditional Granger causality tests hold true in the bivariate system. But, we observe bi-causality under longer lag specifications, and when extra variables are added.