Testing the Friedman-Schwartz hypothesis using time varying correlation

Abstract

This study analyses the time varying correlation of money and output using the DCC GARCH model for the Euro, India, Poland, the UK and the US. Apart from simple sum money, this model uses Divisia monetary aggregate, which is theoretically shown as the actual measure of monetary services. The inclusion of Divisia money affirms the Friedman-Schwartz hypothesis that money is procyclical. Theprocyclical nature of association was not robustly observed in recent data when simple sum money was used.