Are Money, Interest Rates, Output and the Exchange Rate Cointegrated? Implications for Monetary Targeting

This study examines the relationship between various monetary aggregates and real income, the 91-day Treasury bill rate, and the nominal exchange rate using the Engle and Granger cointegration method. The idea is that the choice for a monetary target should be controllable by the Central Bank and must have a stable and predictable relationship with variables of interest to policymakers. The results show that only M1 is cointegrated with real income, the 91-day Treasury bill rate, and the nominal exchange rate taken together. Overall, the results imply that M1 is the best choice for a target variable.