RDP 8903: The Relationship Between Financial Indicators and Economic Activity: Some Further Evidence Appendix B: Tests using Alternative Data

Glenn Stevens and Susan Thorp

June 1989

The first four tables in this Appendix duplicate the tests reported in Tables 1 to 4 in the main paper, except that the data are not seasonally adjusted. Seasonality is captured by including seasonal dummies in the regression equations.

Tables B.1 and B.2 show results using GDP as the activity variable. Compared with the results in the main paper, the principal difference is that there are no cases of GDP leading M3 or bank lending. There is still support for GDP leading the broader aggregates, though not as strong as in the seasonally adjusted case.

Table B1: VAR Tests of Financial Indicators and Gross Domestic Product1
(not seasonally adjusted data)
1969:2–1988:3
  Nom GDP M1   Nom GDP M3   Nom GDP Bank lend.   Nom GDP Bill Rate
Nom GDP 2.418 1.205 Nom GDP 2.449 1.527 Nom GDP 2.279 1.510 Nom GDP 1.576 1.127
M1 1.648 3.594* M3 1.382 3.924** Bank lend. 0.698 6.552** Bill Rate 0.719 0.044
1978:1–1988:3
  Nom GDP M1   Nom GDP M3   Nom GDP Bank lend.   Nom GDP Bill Rate
Nom GDP 4.637** 4.186** Nom GDP 1.848 0.228 Nom GDP 1.539 0.303 Nom GDP 2.083 1.324
M1 0.831 0.728 M3 0.925 0.932 Bank lend. 0.160 3.427* Bill Rate 0.885 0.461
  Nom GDP Broad money   Nom GDP AFI lend.   Nom GDP Credit      
Nom GDP 1.458 0.284 Nom GDP 1.536 1.523 GDP 1.424 0.592      
Broad money 2.600 0.747 AFI lend. 2.338 3.791* Credit 2.866* 4.885**      
1969:2–1988:3
  Real GDP M1   Real GDP M3   Real GDP Bank lend.   Real GDP Bill Rate
Real GDP 2.764* 0.826 Real GDP 2.415 1.518 Real GDP 2.389 0.760 Real GDP 2.175 0.312
M1 1.103 3.592* M3 0.489 4.749** Bank lend. 1.202 9.844** Bill Rate 1.290 0.065
1978:1–1988:3
  Real GDP M1   Real GDP M3   Real GDP Bank lend.   Real GDP Bill Rate
Real GDP 1.882 1.075 Real GDP 1.535 0.853 Real GDP 1.410 1.324 Real GDP 1.569 1.171
M1 0.941 0.702 M3 1.227 0.608 Bank lend. 0.658 2.759* Bill Rate 0.822 0.652
  Real GDP Broad money   Real GDP AFI lend.   Real GDP Credit      
Real GDP 1.430 0.982 Real GDP 1.115 1.273 Real GDP 1.069 1.252      
Broad money 2.652 0.682 AFI lend. 5.507** 2.688* Credit 4.754** 3.265*      
1 Calculated values for F-tests of the hypothesis that the coefficients on lags of explanatory variables are jointly zero. An* denotes significance at the 5 per cent level, ** at the 1 per cent level.
Table B2: VAR Tests of Financial Indicators and Gross Domestic Product1
(not-seasonally adjusted data)
1969:2–1988:3
  Nom GDP Bill rate M1   Nom GDP Bill rate M3   Nom GDP Bill rate Bank lend.
Nom GDP 2.209 1.266 1.341 Nom GDP 2.016 0.751 1.120 Nom GDP 1.209 1.477 1.846
Bill Rate 0.238 1.430 3.902** Bill rate 0.402 0.602 2.718* Bill rate 0.530 0.215 0.919
M1 0.605 6.842** 1.489 M3 0.958 4.344** 4.031** Bank lend. 0.656 2.544* 9.460**
1978:1–1988:3
  Nom GDP Bill rate M1   Nom GDP Bill rate M3   Nom GDP Bill rate Bank lend.
Nom GDP 3.475* 0.370 2.616 Nom GDP 1.576 1.117 0.167 Nom GDP 1.762 1.598 0.658
Bill Rate 0.396 1.418 1.692 Bill rate 0.289 0.694 1.584 Bill rate 0.876 0.391 0.518
M1 0.448 3.470* 1.215 M3 0.810 0.293 0.884 Bank lend. 0.172 0.039 2.707
  Nom GDP Bill rate Broad money   Nom GDP Bill rate AFI lend.   Nom GDP Bill rate Credit
Nom GDP 1.678 1.170 0.262 Nom GDP 2.149 1.989 2.181 Nom GDP 1.421 2.518 1.770
Bill Rate 0.579 1.648 4.563** Bill rate 1.194 0.285 1.756 Bill rate 1.163 0.396 0.959
Broad money 2.839* 1.830 1.017 AFI lend. 1.197 0.482 2.085 Credit 3.690 1.000 5.744**
1969:2–1988:3
  Real GDP Bill rate M1   Real GDP Bill rate M3   Real GDP Bill rate Bank lend.
Real GDP 2.375 0.159 0.639 Real GDP 1.934 0.705 1.868 Real GDP 2.152 0.344 0.767
Bill Rate 0.511 1.269 3.606* Bill rate 1.017 0.667 2.815* Bill rate 1.481 0.267 1.336
M1 0.663 7.617** 1.954 M3 0.341 4.604** 5.689** Bank lend. 1.514 2.962* 13.437**
1978:1–1988:3
  Real GDP Bill rate M1   Real GDP Bill rate M3   Real GDP Bill rate Bank lend.
Real GDP 1.662 0.901 0.819 Real GDP 1.528 1.270 0.984 Real GDP 1.347 0.880 1.011
Bill Rate 0.377 1.584 1.732 Bill rate 0.274 0.859 1.627 Bill rate 0.769 0.627 0.468
M1 0.640 3.609 0.886 M3 1.174 0.384 0.524 Bank lend. 0.611 0.041 2.224
  Real GDP Bill rate Broad money   Real GDP Bill rate AFI lend.   Real GDP Bill rate Credit
Real GDP 1.813 1.146 0.979 Real GDP 1.281 0.921 1.009 Real GDP 0.990 2.018 2.098
Bill Rate 0.275 1.832 4.174** Bill rate 0.868 0.171 1.467 Bill rate 0.613 0.431 0.475
Broad money 2.438 1.430 0.754 AFI lend. 3.727* 0.505 0.949 Credit 5.359** 0.882 3.616*
1 Calculated values for F-tests of the hypothesis that the coefficients on lags of explanatory variables are jointly zero. An * denotes significance at the 5 per cent level, ** at the 1 per cent level.

Tables B.3 and B.4 show results using PFD as the activity variable. The main difference with earlier results here is that PFD leads broader aggregates more often, and that the narrow monetary aggregates M1 and M3 lead PFD when the 1970s data are included in the sample period.

Table B3: VAR Tests of Financial Indicators and Private Final Demand1
(not-seasonally adjusted data)
1969:2–1988:3
  Nom PFD M1 Nom PFD M3   Nom PFD Bank lend.   Nom PFD Bill Rate
Nom PFD 1.824 2.813* Nom PFD 1.626 2.736* Nom PFD 1.420 1.004 Nom PFD 2.559* 0.284
M1 1.306 3.277* M3 0.619 4.757** Bank lend. 1.581 8.256** Bill Rate 0.944 0.197
1978:1–1988:3
  Nom PFD M1   Nom PFD M3   Nom PFD Bank lend.   Nom PFD Bill Rate
Nom PFD 0.061 1.490 Nom PFD 0.701 2.926 Nom PFD 0.273 1.153 Nom PFD 0.189 0.062
M1 2.516 1.720 M3 0.101 0.800 Bank lend. 0.281 3.322* Bill Rate 2.387 0.578
  Nom PFD Broad money   Nom PFD AFI lend.   Nom PFD Credit      
Nom PFD 0.157 1.289 Nom PFD 0.180 0.383 Nom.PFD 0.235 0.332      
Broad money 3.209* 1.546 AFI lend. 1.738 1.875 Credit 0.606 3.329*      
1969:2–1988:3
  Real PFD M1   Real PFD M3   Real PFD Bank lend.   Real PFD Bill Rate
Real PFD 0.192 3.186* Real PFD 0.643 3.971** Real PFD 0.222 1.704 Real PFD 0.555 1.571
M1 1.438 3.160* M3 0.716 5.112** Bank lend. 0.904 9.071** Bill Rate 4.501** 0.934
1978:1–1988:3
  Real PFD M1   Real PFD M3   Real PFD Bank lend.   Real PFD Bill Rate
Real PFD 0.232 1.978 Real PFD 0.613 2.301 Real PFD 0.296 1.093 Real PFD 0.320 0.280
M1 1.762 1.512 M3 0.371 0.876 Bank lend. 0.767 3.091* Bill Rate 3.325* 0.977
  Real PFD Broad money   Real PFD AFI lend.   Real PFD Credit      
Real PFD 0.365 2.388 Real PFD 0.356 1.393 Real PFD 0.369 0.898      
Broad money 3.984* 1.519 AFI lend. 4.607** 1.009 Credit 2.169 2.046      
1 Calculated values for F-tests of the hypothesis that the lags of explanatory variables are jointly zero. An* denotes significance at the 5 per cent level, ** at the 1 per cent level.
Table B4: VAR Tests of Financial Indicators and Private Final Demand1
(not-seasonally adjusted data)
1969:2–1988:3
  Nom PFD Bill rate M1   Nom PFD Bill rate M3   Nom PFD Bill rate Bank lend.
Nom PFD 1.409 0.180 2.543* Nom PFD 1.408 0.126 2.409 Nom PFD 1.734 0.811 1.511
Bill Rate 0.180 1.504 3.581* Bill rate 0.274 0.634 2.338 Bill rate 0.679 0.271 0.859
M1 1.336 8.305** 1.843 M3 0.741 4.953** 5.007** Bank lend. 1.753 2.828* 11.307**
1978:1–1988:3
  Nom PFD Bill rate M1   Nom PFD Bill rate M3   Nom PFD Bill rate Bank lend.
Nom PFD 0.293 0.837 2.224 Nom PFD 0.403 0.290 2.871* Nom PFD 0.342 0.272 1.253
Bill Rate 0.785 0.629 0.832 Bill rate 1.315 0.691 1.383 Bill rate 2.664 0.840 0.892
M1 0.798 2.207 1.270 M3 0.138 0.341 0.579 Bank lend. 0.307 0.067 2.749*
  Nom PFD Bill rate Broad money   Nom PFD Bill rate AFI lend.   Nom PFD Bill rate Credit
Nom PFD 0.079 0.182 1.271 Nom PFD 0.185 0.065 0.345 Nom PFD 0.244 0.086 0.322
Bill Rate 1.069 1.670 3.531* Bill rate 1.948 0.287 1.183 Bill rate 1.884 0.568 0.414
Broad money 2.077 0.709 1.337 AFI lend. 0.961 0.711 1.806 Credit 1.065 0.620 3.706*
1969:2–1988:3
  Real PFD Bill rate M1   Real PFD Bill rate M3   Real PFD Bill rate Bank lend.
Real PFD 0.236 0.671 2.116 Real PFD 0.564 0.953 3.139* Real PFD 0.473 1.256 1.380
Bill Rate 1.631 1.695 1.816 Bill rate 3.391* 1.485 2.244 Bill rate 4.667** 1.414 1.437
M1 0.778 7.346** 1.927 M3 0.872 5.003** 6.232** Bank lend. 1.620 3.395* 12.866**
1978:1–1988:3
  Real PFD Bill rate M1   Real PFD Bill rate M3   Real PFD Bill rate Bank lend.
Real PFD 0.110 0.208 1.679 Real PFD 0.581 0.452 2.265 Real PFD 0.500 0.447 1.175
Bill Rate 1.554 0.737 0.899 Bill rate 1.833 1.015 1.172 Bill rate 3.153* 1.110 0.608
M1 0.684 2.773 1.315 M3 0.543 0.508 0.607 Bank lend. 0.953 0.266 2.881*
  Real PFD Bill rate Broad money Real PFD Bill rate AFI lend.   Real PFD Bill rate Credit  
Real PFD 0.211 0.352 2.216 Real PFD 0.347 0.101 1.051 Real PFD 0.334 0.131 0.660
Bill Rate 1.235 1.889 2.859* Bill rate 2.087 0.441 0.627 Bill rate 2.259 0.585 0.092
Broad money 2.892* 0.860 1.485 AFI lend. 3.714* 1.024 0.664 Credit 2.972* 0.974 2.420
1 Calculated values for F-tests of the hypothesis that the lags of explanatory variables are jointly zero. An* denotes significance at the 5 per cent level, ** at the 1 per cent level.

Table B.5 shows the results from Section 5 of the paper when M7PFD is excluded. The main differences are that in the absence of M7PFD, the price differential term PDIFF helps to explain both real GDP and the bill rate, and that the TWI is no longer significant in the equations for exports and imports.

Table B5: VAR Tests of Financial Indicators and Trade Sector Indicators1
(seasonally adjusted data)
1972:2–1988:2
  Real GDP Bill rate M1 TWI PDIFF   Real GDP Bill rate M3 TWI PDIFF
Real GDP 2.019 0.821 1.824 0.759 2.653* Real GDP 1.316 1.182 0.466 0.714 2.835*
Bill rate 0.122 6.974** 4.803** 0.888 3.119* Bill rate 0.817 7.074** 5.943** 1.952 4.135**
M1 1.646 2.390 1.597 1.543 0.905 M3 1.543 3.258* 4.604** 1.378 1.833
TWI 1.383 1.150 1.364 1.157 0.672 TWI 1.335 2.217 1.338 1.952 1.255
PDIFF 0.509 3.368* 0.269 0.777 1.262 PDIFF 0.352 1.356 1.866 0.400 1.126
1972:2–1988:2
  Real Xpts Bill rate M1 TWI PDIFF   Real Xpts Bill rate M3 TWI PDIFF
Real Xpts 0.692 0.482 1.956 3.048* 0.523 Real Xpts 1.562 0.642 0.456 2.068 0.634
Bill rate 2.068 6.833** 7.658** 1.311 3.134* Bill rate 1.822 6.965** 7.474** 2.119 4.849**
M1 1.764 1.294 1.750 2.527 0.855 M3 0.939 1.907 5.692** 1.463 1.641
TWI 1.810 1.631 1.649 0.594 0.726 TWI 1.422 2.262 1.288 1.158 1.415
PDIFF 1.278 3.455* 0.720 1.315 1.170 PDIFF 1.009 1.316 2.267 0.621 1.251
1972:2–1988:2
  Real Mpts RealPFD M1 TWI PDIFF   Real Mpts Real PFD M3 TWI PDIFF
Real Mpts 0.454 1.720 2.600* 2.367 1.431 Real Mpts 0.534 2.841* 2.759* 2.271 1.535
Real PFD 0.205 0.821 1.122 0.517 0.960 Real PFD 0.297 0.867 1.565 1.282 1.652
M1 1.905 3.251* 3.197* 2.547 2.869* M3 1.722 2.560 1.620 1.105 3.984**
TWI 0.199 0.328 1.503 0.489 0.271 TWI 0.891 0.728 1.114 0.825 1.446
PDIFF 3.075* 1.827 1.809 0.386 2.084 PDIFF 3.790** 0.999 6.671** 0.329 2.619*
1 Calculated values for F-tests of the hypothesis that the lags of explanatory variables are jointly zero. An* denotes significance at the 5 per cent level, ** at the 1 per cent level.

The tests reported in Appendix A suggested that some series may contain deterministic time trends in addition to unit roots. If so, these series should arguably be detrended as well as differenced before use in VAR models.

The series in question are:

  • M1, M3, Bank lending, M7PFD – linear time trend;
  • Broad money, AFI lending, Credit, TWI – quadratic time trend.

Results for tests using detrended data are available from the authors on request. There are few significant differences. If anything, the evidence for measures of activity leading the broader financial aggregates is marginally stronger when the latter are detrended.