Money and output: correlation or causality?

The correlation between changes in the nation's total supply of money and subsequent changes in real output has led some people to infer that policymakers, by changing the money supply, can stimulate or moderate the nation's real output. ; Scott Freeman argues that this conclusion may be inappropriate. Freeman distinguishes inside money, the money created by banks through their lending, from outside money, the money the Federal Reserve prints. He shows that anticipatory increases in bank lending may account for the rise in the money supply that often precedes an expansion in real output. Under this interpretation, increases in the money supply that are due to Federal Reserve action result in higher prices, with no increase in real output. Thus, the existence of a correlation between money and output does not necessarily imply that Fed-engineered increases in the money supply have real effects.