Real money demand and supply meets Federal debt

Abstract

This article presents the empirical results of an econometric investigation of the demand and supply of real money (M2) with real Federal debt in the USA economy as a Vector Auto-Regressions (VARs) system. This allows the study to focus on the crucial variables of fiscal and monetary policies, specifically the debt (wealth-creating instruments), the real monetary base and the relevant rates of interest. The long- and short-run effects of these variables over the quarterly data, spanning from 1960 to 2007, are analysed. Clearly, this is a well-researched field, where others have published excellent work, although this investigation differs in its choice of variables. The idea is to explain the dynamics and mechanisms of adjustment, generally left unexplained by economic theory.