Testing For The Relationships And Affecting Effects Between Nominal And Real Variables

In the study of economics, the relations between nominal economic variables and real economic variables have always been thought in great importance, and there also have been many different propositions about these relations. In the opinions of the classical dichotomy, the real economy is uncorrelation to the nominal economy. When the nominal variables that measured with currency changed in the same scale, they only have effects on price and wage, but have no effects on real economy variables. If the classical dichotomy is correct, it means that the money variables have no significant influence on the real economy (Sargent,1989). But the monetarists that lead by Friedman take money ton the important status in the extreme, they insist that there is no economic activity can be separated from money credit forms, and all the changes of economic variables are correlated with money. Money is the mostly impetus to the changes of output and employment. Thereafter, many schools have made different parlances about these relations.Different conclusions based on the different hypothesize. In China, the economy environments are more closed to the hypothesize of the opinion that the monetary policy is in effect, and many scholars and empirical evidences trend to support that real economy can not separate from nominal economy, and there are significant correlations with them. There are too many literatures studying on the correlations with real economy and nominal economy, so this article need not to stress on it again. We will study the forecasting ability of nominal economic variables to the real economic variables.Since there are correlations with real economic variables and nominal economic variables, then if can money and stock forecast real GDP? And whose forecasting ability is better? To answer these questions, the article made a empirical test on the economic data of China from 1989 to 2002 in monthly.Before the test, let's review the monetary theory first.The monetarists argue that the quantity of money has great effects on the real economic variables. Friedman and Schwartz (1963a) had demonstrated that the growth of money supply is positive with business cycle, and there is just an advance in the time.Many macroeconomic models have introduced monetary variables in themselves. Just like Tobin model, MIU and CIA etc.The conclusions of MIU and CIA are that money is hyperneutral. But this cannot explain stylized facts before. The adjust of price must lag behind the economy volatility. These are several reasons on the stickiness of price, for examples, the imperfect competition in the market, imperfect information, uncertainty etc. Nominal price cannot adjust immediately, and the slow adjustment is the channel to nominal variable affecting the real economy.Before constitute the models, some preliminary evidence can help us recognize the relations between nominal variables and real variables.The result of the regression on real GDP of money and real interest displays that the regression coefficients of M0 and M1 are very significant. But when take part in the real interest, it's coefficient is significant only when make M0 be the monetary variable.Since the variables are instable but have cointegration equations, we can choose ECM to be the correct model. And we take an autoregression of GDP as benchmark model.We begin from the model that only has two variables. Whether use M0 or M1 as the quantity of money, the coefficients of long run and short run are all significant. The quantity of money in advance have significant effect on real GDP, so we can use money in advance to forecast real GDP.When adding stock price index to the model, it is different in the result for the model use M0 and M1. For M0, long run coefficient of stock price index is significant, and there is one significant coefficient of stock price index in short run. For M1, long run coefficient of stock price index is still significant, but none of the short run coefficient is significant.When adding real interest to the model...