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The information content of the paper-bill spread

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THE INFORMATION CONTENT OF THE PAPER-BIl1L SPREAD Kenneth M. Emery Senior Economist August 1994 RESEARCH DEPARTMENT WORKING PAPER 94-12 Federal Reserve Bank of Dallas This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected]) The Information Content of the Paper-Bill Spread by •Kenneth M. Emery August 1994 Abstract In a series of articles, Benjamin M. Friedman and Kenneth N. Kuttner argue that the difference between the commercial paper rate and the Treasury bill rate has highly significant predictive value for real output even in the presence of money and regardless of sample. The results presented in this paper cast doubt on these claims. JEL Classification: E44, E47. * Senior Economist, Federal Reserve Bank of Dallas, 2200 N. Pearl St., Dallas, TX 75201, (214) 922-5162. I would like to thank Nathan S. Balke, John V. Duca, and Evan F. Koenig for helpful comments and Chih-Ping Chang for providing excellent research assistance. The views expressed are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System. This paper was motivated by my discussion of a paper presented by Mark A. Thoma and Jo Anna Gray at the Texas Conference on Monetary Economics in Dallas on April 24, 1994. 1. Introduction Building on the money-income link literature that dates back to Sims (1972, 1980) and more recently Stock and Watson (1989), Benjamin M. Friedman and Kenneth N. Kuttner in a series of articles (1989, 1992, 1993a, 1993b), claim that the difference between the commercial paper rate and the Treasury bill rate has highly significant predictive value for real output (as measured by industrial production), even in the presence of money and regardless of sample.' Friedman and Kuttner also claim that including the 1980s in their analysis results in a breakdown of the predictive content of money for real output, while the spread

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