Money balances in the production function: Nonlinear tests of model stability and measurement issues – two sides of the same coin?

Money balances in the production function: Nonlinear tests of model stability and measurement issues – two sides of the same coin? a r t i c l e i n f o a b s t r a c t Available online xxxx Keywords: Money in the production function Monetary policy Asymmetric effects Stabilization Past empirical attempts to test the role of money in the production function following the Sinai and Stokes (1972) preliminary Cobb–Douglas model specification estimated in 1929–1967, using yearly data, have focused on estimating alternative production function models, such as CES and Translog, and experimenting with alternative specifications of the monetary variable. Most research in the United States on this topic has involved four basic datasets: annual data in the period 1929–1967, nonfinancial quarterly data in the The current research uses MARS modeling, general additive modeling, flexible least squares and VAR methods to assess whether there is evidence of nonlinearity and/or model structural change that is impacted by whether a monetary variable has been added to the model specification or a different period is under study. VAR modeling is used with the nonfinancial quarterly dataset to assess whether shocks in the financial sector, as measured by log real M2, can impact the real sector. Since a significant impact is found on log capital, log labor and log real output, the implication is that the real sector is not isolated from the financial sector. One way to think of this is that shocks to the financial sector can have dynamic effects on the real sector.