US money supply and global business cycles: 1979–2009

Abstract

This article investigates the effects of the US money supply shock on global business cycles by employing a global vector autoregressive model containing 26 economies over the period from 1979Q2 to 2009Q4. The US money supply is incorporated as an endogenous variable for the US and a global factor for other economies. When a positive US money supply shock hits the global economy, developed economies (such as the US, Euro area and the UK) will have neither real output decline nor inflation pressure, while China and some other developing countries are going to have a significant decline of real GDP. The international spillover of the liquidity effect exists. The global effects of quantitative easing are discussed as well.

Keywords:

• world currency
• US money supply
• business cycle

JEL Classification:

• C32
• E44
• E51
• F33

Acknowledgements

The authors thank the participants of the Macroeconomics Workshop at the University of Cambridge, the 2014 Econometric Society Australasian Meeting, the National Economics Seminar of Renmin University of China and two anonymous referees for their helpful comments.

Notes

¹ We would like to point out that in PSW the money supply of each country is included in VARX* models as an endogenous variable. However, the model specification and research purpose are quite different from ours.

² A robust analysis in which the time-varying weights are used will be implemented, just as in DdPS and Xu (2012). We will discuss about it later.

³ Liu (2014) builds a multi-country large-open-economy DSGE model, in which the money supply of US dollar as a world currency plays its global roles and exists as a key variable in the log-linearized cyclical representation of the global model.

⁴ The website address is http://research.stlouisfed.org/fred2/categories/24

⁵ This report is downloaded from http://www.treasury.gov/press-center/press-releases/Pages/report3084.aspx

⁶ For our model, changing the sample from 1979Q2–2009Q4 to 1979Q2–2008Q4 will not change the main results of the impulse response analysis below and the main conclusions of this article.

⁷ ‘Latin America’ here includes Brazil, Mexico, Argentina, Chile and Peru. The regional aggregation variables are constructed from the country-specific variables by using PPP-GDP weights. Refer Smith and Galesi (2010) for details.

⁸ The detailed estimation results in this part are available upon request.

⁹ Computing time-varying trade weights was initialized by using the same set of weights for the first 3 years of the sample period.

Additional information

Funding

This research is supported by the Fundamental Research Funds for the Central Universities, and the Research Funds of Renmin University of China [No. 15XNF012].