More Evidence on the Money‐output Relationship

Recent studies have found that money loses its explanatory power over output if the 2980s are included in the sample. Interest rates, not money, appear to predict output. Using annual data for 1915–1993 and quarterly data for 1960–1993, we demonstrate that the supposed breakdown in the money‐output relationship stems from the type of stationary assumption imposed on the data. Assuming difference‐stationary produces results found in the literature. Assuming trend‐stationary produces results indicating that money and output remain statistically related. Moreover, the change in the stationarity assumption greatly affects the quantitative importance cf interest rates in explaining output.