Money and the Production Function: A test for Specification Errors

Co-integrated money in the production function–evidence and implications

“…Their findings suggest that, both money (credit) and human capital play a significant role in the economic growth rate. However, the empirical criticism of money as a factor of production has included channels through which money affects the level of economic activity (Ben-Zoin and Rutten, 1975), the exact nature of auto-correlation adjustments and the fact that money may have been misspecified as an input (Boys and Kavanaugh, 1979).…”

Old Wine in a New Bottle: Are Financial Variables Omitted Variables in the Production Function?

“…For the empirical purposes of the paper and following Boyes and Kavanaugh (1979) we make use of a CES functional form for the production function. Solow (1957Solow ( , 1958 has also emphasized the importance of the CES specification based on small trends in factor shares of income, a fact that is consistent with the observed 'relative stability' of these shares over time.…”

“…Fisher (1974) also diminished the role of money in the production process by examining the role of cash balances in the technology of transactions and argued that it is practically impossible to construct an index of money that considers the saving of resources from its use. Moreover, Ben-Zion and Ruttan (1975) and Niccoli (1975) criticized the absence of a theoretical mechanism that relates money and output through the production function approach, while Prais (1975aPrais ( , 1975b and Boyes and Kavanaugh (1979) exemplified the misspecification of money in the production function approach. Finally, Nguyen (1986) and Betancourt and Robles (1989) showed empirically the absence of any solid justification for incorporating money as an input in an aggregate production function because such a procedure cannot ameliorate both the technological character of production and the associated exchange relationships.…”

Old Wine in a New Bottle: Are Financial Variables Omitted Variables in the Production Function?

“…For the empirical purposes of the paper and following Boyes and Kavanaugh (1979) we make use of a CES functional form for the production function. Solow (1957Solow ( , 1958 has also emphasized the importance of the CES specification based on small trends in factor shares of income, a fact that is consistent with the observed 'relative stability' of these shares over time.…”