Real Money Balances and Production Efficiency: A Panel-Data Stochastic Production Frontier Study
Journal of Macroeconomics
This paper examines the effect of four alternative measures of real money balances on production efficiency using annual panels of 10 developed and 10 developing countries. Using maximum likelihood, separate stochastic production frontiers are estimated, along with the parameters of an equation relating technical inefficiency to real money balances. The results for the sample of developed economies indicate that increases in real simple-sum M1, simple-sum M2, Divisia M1, and Divisia M2 enhance efficiency in the production sector. On the other hand, in the sample of developing nations, there is no evidence that real money balances reduce technical inefficiency.