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AbstractRecent 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.

Large fluctuations in the dollar value in recent years rekindled fears of increased U.S. price instability. With monthly data, we employ the cointegration and error-correction modeling technique to examine the nature of the interrelationship between the dollar and U.S. prices in a multivariate setting. The empirical results reveal strong and lasting effects of changes in the dollar exchange rate on U.S. inflation. The results also indicate that money supply exerts a potent and quick impact upon U.S. prices. Therefore, it seems that the Federal Reserve has shouldered much of the responsibility with respect to U.S. price stability in the face of the dramatic changes in the dollar value in recent years.