An Empirical Investigation of the Effects of Monetary Changes on the U.K. Economy

Theoretical discussions involving the relationship between the money supply and an economy\u27s output has dominated the field of monetary economics for many years. Theoretically, the resolution of two separate issues is crucial - (1) the question of causality in the money-income relationship and (2) the effects of monetary changes on the two components of nominal output; i. e., the price level and real output. Two major opposing views can readily be identified: the monetarist view and the keynesian view. The monetarists\u27 view is based on the postulates of the Quantity Theory of Money. In their view, the money supply is exogenously determined. Furthermore, according to the monetarists, there exists a direct causal flow from money to nominal output. 3 Consequently, changes in the money supply dominate movements in nominal output. Some monetarists allow for a feedback from nominal output to the money supply, but even then, monetary changes are considered the major factors determining nominal output