ON THE CORRELATION OF NOMINAL MONEY AND REAL OUTPUT: A SIMPLE CROSS-COUNTRY ANALYSIS
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The relationship between real and nominal variables is a fundamental problem in macroeconomics. This study examines correlations of nominal monetary aggregates (the monetary base, M1, and M2) and real output in a broad sample of countries in the 1975-2000 period. On average we typically observe small but statistically significantly positive correlations. For the monetary base and M1, there is a tendency of money changes to precede output changes since the half lag in money is more strongly correlated with output than the half lead in money; M1 and M2 are more strongly associated with real output than the monetary base. In high-inflation countries, the given correlations are typically negative, which indicates a possibility that very high money growth is harmful for the growth of real output.
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