Economic Models - Convex Optimization

Credit and Income 205
My data is obtained on line from the Federal Reserve Bank of Saint Louis,
Missouri, through their open source database. 7
Researchers usually employ some measure of the stock of money over
GNP, as a proxy for the size of the “financial depth” (see for instance,
Goldsmith, 1969; Mckinnon, 1973). This type of financial indicator does
not inform us as to whether the liabilities are those of the central banks,
commercial banks, or other financial intermediaries. In this way, the creditchannel
issue cannot be analyzed, and the significant role of credit cannot
be isolated. Moreover, this type of financial indicator is mainly applicable
to the developing countries, since the financing of the economy is to a
great extent carried out by the public sector and controlled mainly by its
central bank.
An advanced economy such as the United States, with a fully liberalized
banking and financial system, provides an excellent case for testing the
modern credit view such that the commercial bank credit itself has to be
modeled as a fundamental, financial, and an independent monetary variable
that affects money income, and hence the economic performance, in the
long run.
Based on the cited references, we would accept the value of commercial
bank credit to the private sector, as a measure of the ability of the banking
system to provide finance-led income growth. The extent to which money
income growth is associated with the credit provision from the financial
sector is examined through the use of contemporary co-integration methods
and system stability analysis.
Initially, the order of integration of the two variables is investigated
using standard unit root tests (Dickey and Fuller, 1979; Harris, 1995). The
next step is the computation of co-integration vectors by applying the maximum
likelihood (ML) approach considering the error-correction representation
of the VAR model (Harris, 1995; Johansen and Juselius, 1990). We
transformed the initial VAR to an equivalent first-order dynamic system
to perform the proper stability analysis, which revealed that the system
under consideration is stable. It should be re-called that stability is of vital
importance for obtaining consistent forecasts, and this issue is stressed
appropriately in Sections 4 (4.2 and 4.6) and 5.
I proceed with the utilization of the vector error-correction modeling
following Engle and Granger (1987), and testing for the short-run dynamic
relationship on causality effects between money and income.
7 And, we are deeply thankful for this.