Scandinavian Working Papers in Economics

Working Paper Series,
Stockholm School of Economics, China Economic Research Center

No 2009-6: IS U.S. MONEY CAUSING CHINA'S OUTPUT?

Anders C. Johansson ()
Additional contact information
Anders C. Johansson: China Economic Research Center, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: This paper tries to answer the long-standing question of whether money causes output. Instead of focusing on domestic monetary policy and output, we analyze U.S. monetary policy and its possible effects on real output in China. Our results indicate that the main monetary instrument in the U.S., the Federal Fund Rate, Granger causes China’s output. A second monetary variable, U.S. money supply, does not seem to have a significant effect on China’s output. The results are supported by variance decompositions, which indicate that Federal Fund Rate shocks have an effect on China’s real output. The findings have important implications for policy makers in China that focus on maintaining a high and stable economic growth.

Keywords: China; United States; Monetary policy; Output; Causality; VECM

JEL-codes: C32; E40; E51; E52; E58

28 pages, First version: March 15, 2009. Revised: May 15, 2009.

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