Money and macroeconomic performance: revisiting divisia money

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...

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Bibliographic Details
Published inReview of financial economics Vol. 14; no. 2; pp. 93 - 101
Main Authors Darrat, Ali F., Chopin, Marc C., Lobo, Bento J.
Format Journal Article
LanguageEnglish
Published New Orleans Elsevier Inc 2005
Elsevier
Elsevier Science Ltd
SeriesReview of Financial Economics
Subjects
Alliances
Cointegration
Correlation analysis
Currency
Divisia money
Dual user cost index
E44
E52
Economic models
Financial innovations
Macroeconomics
Monetary policy
Policy shifts
Simple-sum money
Studies
United States > US
E52
E44
Cointegration
Dual user cost index
Policy shifts
Divisia money
Simple-sum money
Financial innovations
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Summary: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.
ISSN:1058-3300
1873-5924
DOI:10.1016/j.rfe.2004.05.002