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Does Uncertainty Impact Money Growth? A Multivariate GARCH Analysis

By David Cronin and Bernard Kennedy


The impact of uncertainty on money growth has occupied a prominent place in monetary policy analysis in recent years. Some 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. We find that macroeconomic uncertainty impacts positively on US real M2 growth over a one- to two-year horizon but that monetary uncertainty does not cause changes. Instead, our results indicate that real money growth causes monetary uncertainty.

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