Money and Output Viewed Through a Rolling Window

We examine the extent to which fluctuations in the money stock anticipate (or Granger cause) fluctuations in real output using a variety of rolling window and increasing window estimation techniques. Various models are considered using simple sum as well as Divisia measures of M1 and M2, income, prices, and both the Tbill rate and the commercial paper rate. Findings indicate that the relation between income, money, prices, and interest rates is stable, as long as sufficient data are used, and that there is cointegration among the variables considered, although cointegration spaces become very difficult to estimate precisely when smaller windows of data are used. Further, both M1 and M2 are shown to be important predictors of income for the entire period from 1960:2-1996:3, based on modified versions of what we term the "most damaging" specifications from Friedman and Kuttner (1993) and Thoma (1994). Our new evidence is based in part on a rather novel model selection approach to examining the relationship between money and income.