Abstract
Recent research suggests that the relation between money and the macroeconomy has sharply weakened in the U.S. after 1980. We reexamine this alleged breakdown by testing for cointegration between the macroeconomy and simple-sum and Divisia monetary aggregates. We check the robustness of our results by modeling multiple key breakpoints around the early 1980s. Unlike the case of simple-sum monetary aggregates, the evidence is overwhelming in its support for cointegration between Divisia money and macroeconomic variables, which persists despite several policy shifts and dramatic financial innovations in the post-1980 period. These results support Divisia money over simple-sum monetary aggregates as a guide in the implementation of monetary policy.
Original language | English (US) |
---|---|
Pages (from-to) | 93-101 |
Number of pages | 9 |
Journal | Review of Financial Economics |
Volume | 14 |
Issue number | 2 |
DOIs | |
State | Published - 2005 |
Keywords
- Cointegration
- Divisia money
- Dual user cost index
- Financial innovations
- Policy shifts
- Simple-sum money
ASJC Scopus subject areas
- Finance
- Economics and Econometrics