Friedman famously defended exactly this idea of money being brought to the economy by helicopters: ‘Let us suppose now that one day a helicopter flies over this community and drops an additional $1000 in bills from the sky … Let us suppose further that everyone is convinced that this is a unique event which will never be repeated’ (Friedman 1969: 4–5).
Keynes responded to the question of money endogeneity in an ambiguous way and seemed to give an affirmative response to it only at certain points of his Treatise on Money (1930) and in other works preceding the writing of The General Theory (1936). For a detailed presentation of Keynes's views on this issue, see Moore (1988: 171–204).
As we know, Friedman used to argue that money is responsible for almost all economic phenomena: ‘[c]hanges in the behaviour of the money stock have been closely associated with changes in economic activity’ (Friedman/Schwartz 1963: 676). However, according to a famous quotation attributed to Solow (quoted in New School 2010): ‘[E]verything reminds Milton [Friedman] of the money supply. Well, everything reminds me of sex, but I keep it out of the paper’.
It is argued in the paper that oil shocks are to blame for the USA's output declines in the 1970s. While this cannot be denied, given the USA's industry dependence on foreign energy, other important events such as the economic (inflationary, etc.) impact of the Vietnam war and the demise of Bretton Woods also played a role. We would like to thank an anonymous referee for pointing this out.
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APPENDIX 1: ZIVOT/ANDREWS STRUCTURAL BREAK TEST AROUND 2007
APPENDIX 2: ADF STATISTICS
APPENDIX 3: FIGURES OF ECONOMIC FLUCTUATIONS, FILTERS (HP) AND (BK)
- The Hodrick–Prescott Filter The trend is obtained by minimising the fluctuations of the actual data around it; that is, by minimising the following function: where y* is the long-term trend of the variable y and the coefficient λ > 0 determines the smoothness of the long-term trend.
The Baxter–King Filter The algorithm consists in constructing two low-pass filters, the first passing through the frequency range
(denoted as , where L is the lag operator) and the second through the range (denoted as ). Subtracting these two filters, the ideal frequency response is obtained and the de-trended time series is: .
APPENDIX 4: WHITE NOISE TESTS AND CORRELOGRAMS
Note: In order to test for autocorrelation we use the Ljung/Box (1978) test which tests the null hypothesis of white noise for a maximum lag length k:
APPENDIX 5: PERIODOGRAMS
APPENDIX 6: CORRELATION
APPENDIX 7: COINTEGRATION AND PAIRWISE GRANGER CAUSALITY TESTS
Having determined that the series are integrated of order (1), we tested for cointegration. We applied OLS on the latter and examined the residuals for stationarity. The empirical results – which are available upon request by the authors – showed that the residuals were stationary (at the 5% level) and the series Y and X were cointegrated. Thus, the error correction model had to be estimated. Lastly, in order to identify the optimal lag length we used the FPE criterion, whose values are also available upon request by the authors.