Money-Income Causality and the Neutrality of Money

We study two related Granger noncasualty hypotheses. First, money equation innovations cannot predict future income. Second, the coefficients on money in the income equation are zero. Furthermore, we test if income is neutral in the long run with respect to money equation innovations. The first and third hypotheses are addressed in the moving average represenation of a cointegrated vector autoregression. Focusing on monthly U.S. data (1959-89) on income, prices, interest rates, and money we obtain weak evidence against the first hypothesis and mixed evidence about the second. Finally, our results suggest that income is not influence by money innovations in the long run