A feature of U.S. postwar business cycle experience that is by now widely documented is the tendency of the spread between the respective interest rates on commercial paper and Treasury bills to widen shortly before the onset of recessions. By contrast, the paper—bill spread did not anticipate the 1990–1991 recession. Empirical work presented in this paper supports two (not mutually exclusive) explanations for this departure from past experience. First, at least part of the paper—bill spread's predictive content with respect to business cycle fluctuations stems from its role as an indicator of monetary policy, but the 1990–1991 recession was unusual in postwar U.S. experience in not being immediately precipitated by tight monetary policy. Second, movements of the spread during the few years just prior to the 1990–1991 recession were strongly influenced by changes in the relative quantities of commercial paper, bank CDs, and Treasury bills that occurred for reasons unrelated to the business cycle. This latter finding in particular sheds light on the important role of imperfect substitutability of different short-term debt instruments in investors' portfolios, and highlights the burdens associated with using relative interest rate relationships as business cycle indicators.

Including data from the 1980s sharply weakens the postwar time-series evidence indicating significant relationships between money (however defined) and nominal income or between money and either real income or prices separately. Focusing on data from 1970 onward destroys this evidence altogether. Evidence indicating cointegration of real income and real money balances, with due allowance for the effect of interest rates, also deteriorates when the sample extends through the 1980s. A positive finding is that the spread between the commercial paper rate and the Treasury bill rate consistently contains highly significant information about future movements in real income.