This thesis addresses the issue of the existence of a causal relationship between the change in the food component of the consumer price index and change in the money supply (money base and M1) by using monthly Canadian data from January 1968 to March 1997. A bivariate vector autoregressive (VAR) model is used to describe the relationship between money supply and food price on the basis of identifying the two conditions that the three series are first difference stationary series and the money stock and price series are not cointegrated. Saunders' lag order selection criterion developed from Akaikes final prediction error (FPE), and Hsiao's lag selection procedure are used to identify the order of lags of each variable in VAR model. The models perform well through all diagnostic checks. All hypotheses are tested by using the likelihood ratio statistic and the chi2-statistic. The Granger test of causality is discussed and implemented in this research. By comparing the causality results of the seasonally adjusted series with those of seasonally unadjusted series we find that they are very sensitive to the seasonal adjustment of the series. For the seasonally adjusted series there is no relationship between money base (MB) and the food component of the consumer price index (FCPI) and there is a unidirectional causal relationship between M1 and FCPI (from M1 to FCPI). But for the seasonally unadjusted series there is a feedback relationship between M1 and FCPI and there is a unidirectional flow from MB to FCPI. The difference of the results is consistent with the findings of Sargent and other writers.

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This dissertation starts by examining the evolution of the Canadian payments system from a historical perspective by reviewing the institutional evolution, as well as the development and adoption of some of the newest payment instruments. Two major trends in recent Canadian payment history are revealed, i.e., cash payments are being replaced by non-cash payments and paper-based payment instruments are being replaced by electronic payment instruments. / Next, we adopt a model proposed by Snellman et al. (2000) to conduct a Canadian study of the retail cash payment flows. The estimated results imply that the share of cash, as well as cheques, in overall retail payments in Canada has declined quite considerably. We then investigate the cash substitution process, as well as the electronification of payments in Canada using S-shaped growth curve models. Our results indicate that although the card payments will continue to further substitute for cash, cash will still remain the preferred medium of retail payments in Canada. However, approximately 80% of all payments are forecasted to be electronic in just 20 years. / This dissertation then extends the existing literature on the long-run money demand relationship in Canada by employing information on the payment technology development as an instrument variable to account for financial innovations that might have caused structural shifts in the money demand equation. The econometric methodology employed is cointegration and error-correction modelling. It is found that our measure of financial innovations removes most of the structural breaks in the money demand equation over the sample period. A unique and significant long-run money demand relationship is detected. The short-run dynamic specifications of the VECM system imply the weak exogeneity of output and interest rates.

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