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Measuring money growth when financial markets are changing

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  • Feldstein, Martin
  • Stock, James H.

Abstract

This paper examines the problem of measuring the growth of a monetary aggregate in the presence of innovations in financial markets and changes in the relationship between individual assets and output. We propose constructing a monetary aggregate so that it is a good leading indicator of nominal GDP; in general the weights on its components vary over time. We investigate two specific procedures: one in which subaggregates discretely switch in and out, and one in which the growth of the aggregate is a time-varying weighted average of the growth of the subaggregates, where the weights follow a random walk. These procedures are used to construct aggregates which potentially augment M2 with stock and/or bond mutual funds. Over 1960-1991, the time-varying aggregates look much like M2, but during 1992-93 the time-varying aggregates outperform M2.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 37 (1996)
Issue (Month): 1 (February)
Pages: 3-27

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Handle: RePEc:eee:moneco:v:37:y:1996:i:1:p:3-27

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Robert Darin & Robert L. Hetzel, 1994. "A shift-adjusted M2 indicator for monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 25-48.
  2. Alexander H. Sarris, 1973. "A Bayesian Approach To Estimation Of Time-Varying Regression Coefficients," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 2, number 4, pages 497-520 National Bureau of Economic Research, Inc.
  3. James H. Stock & Martin Feldstein, 1994. "Measuring Money Growth When Financial Markets Are Changing," NBER Working Papers 4888, National Bureau of Economic Research, Inc.
  4. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters, in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
  5. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
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  8. Bennett T. McCallum, 1989. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc.
  9. Rotemberg, Julio J & Driscoll, John C & Poterba, James M, 1995. "Money, Output, and Prices: Evidence from a New Monetary Aggregate," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 67-83, January.
  10. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
  11. Donald W.K. Andrews & Inpyo Lee & Werner Ploberger, 1992. "Optimal Changepoint Tests for Normal Linear Regression," Cowles Foundation Discussion Papers 1016, Cowles Foundation for Research in Economics, Yale University.
  12. Athanasios Orphanides & Brian Reid & David H. Small, 1994. "The empirical properties of a monetary aggregate that adds bond and stock funds to M2," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 31-51.
  13. Cooley, Thomas F & Prescott, Edward C, 1973. "An Adaptive Regression Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 364-71, June.
  14. Barnett, William A & Fisher, Douglas & Serletis, Apostolos, 1992. "Consumer Theory and the Demand for Money," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 2086-2119, December.
  15. John V. Duca, 1993. "Should bond funds be included in M2?," Research Paper 9321, Federal Reserve Bank of Dallas.
  16. Cooley, Thomas F & Prescott, Edward C, 1973. "Tests of an Adaptive Regression Model," The Review of Economics and Statistics, MIT Press, vol. 55(2), pages 248-56, May.
  17. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1, October.
  18. Cooley, Thomas F & Prescott, Edward C, 1976. "Estimation in the Presence of Stochastic Parameter Variation," Econometrica, Econometric Society, vol. 44(1), pages 167-84, January.
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Citations

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Cited by:
  1. William Barnett & Yi Liu, 2012. "The CAPM-Extended Divisia Monetary Aggregate with Exact Tracking under Risk," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201213, University of Kansas, Department of Economics, revised Sep 2012.
  2. William A. Barnett & Milka Kirova & Meenakshi Pasupathy, 1996. "Technology Modeling: Curvature is not Sufficient for Regularity," Econometrics 9602002, EconWPA, revised 24 Jun 1999.
  3. Frank Browne & Gabriel Fagan & Jerome Henry, 2005. "Money Demand in EU Countries: A Survey," Macroeconomics 0503004, EconWPA.
  4. William Barnett & Yi Liu & Haiyang Xu & Mark Jensen, 2012. "The CAPM Risk Adjustment Needed for Exact Aggregation over Financial Assets," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201215, University of Kansas, Department of Economics, revised Sep 2012.
  5. Lance J. Bachmeier & Norman R. Swanson, 2003. "Predicting Inflation: Does The Quantity Theory Help?," Departmental Working Papers 200317, Rutgers University, Department of Economics.
  6. Barnett, William A, 1997. "Which Road Leads to Stable Money Demand?," Economic Journal, Royal Economic Society, vol. 107(443), pages 1171-85, July.
  7. John B. Carlson & Dennis L. Hoffman & Benjamin D. Keen & Robert H. Rasche, 1999. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Working Paper 9917, Federal Reserve Bank of Cleveland.
  8. Feldstein, Martin & Stock, James H., 1996. "Measuring money growth when financial markets are changing," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 3-27, February.
  9. John V. Duca, 1994. "Would the addition of bond or equity funds make M2 a better indicator of nominal GDP?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 1-14.
  10. Dai, Meixing, 2009. "On the role of money growth targeting under inflation targeting regime," MPRA Paper 13780, University Library of Munich, Germany.
  11. Leigh Drake & Adrian Fleissig, 2004. "Admissible Monetary Aggregates and UK Inflation Targeting," Money Macro and Finance (MMF) Research Group Conference 2004 2, Money Macro and Finance Research Group.

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