THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 679

CHAPTER 25 Transmission Mechanisms of Monetary Policy 647 Output, Y Peak + Peak Years Trough (a) Aggregate output Money Supply, M + Peak Peak Years Trough (b) Money supply Rate of Money Supply Growth, Peak *M /M + Peak Years Trough (c) Rate of money supply growth FIGURE 25-2 Hypothetical Example in Which Money Growth Leads Output Although neither M nor Y leads the other (that is, their peaks and troughs coincide), *M/M has its peaks and troughs one year ahead of M and Y, thus leading both series (Note that M and Y in the panels are drawn as movements around a positive average value; a plus sign indicates a value above the average, and a minus sign indicates a value below the average, not a negative value.) has its peaks and troughs exactly one year before the peaks and troughs of the output series We conclude that in our hypothetical economy, the rate of money growth always decreases one year before output does This evidence does not, however, imply that money growth drives output In fact, by assumption, we know that this economy is one in which causation actually runs from output to the level of money supply, and there is no lead or lag relationship between the two Only by our judicious choice of using the growth rate of the money supply rather than its level have we found a leading relationship