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Regime Shifts in the Indicator Properties of Narrow Money in Canada

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Author Info
Tracy Chan
Ramdane Djoudad
Jackson Loi

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Abstract

Financial innovations and the removal of the reserve requirements in the early 1990s have made the distinction between demand and notice deposits arbitrary. This classification issue has affected those narrow monetary aggregates (gross and net M1) that rely on a proper distinction for their definition, and may have eroded their value as indicators. The authors examine whether the indicator properties of various narrow aggregates for the growth of real output have changed over time. They find evidence of a regime shift in the relationship between real and narrow monetary aggregates and the growth of real output, which seems to have occurred in 1992. More specifically, their results show that real M1+, the definition of which is not based on the distinction between demand and notice deposits, has become a more useful indicator in predicting the growth of real output over the more recent period.

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Paper provided by Bank of Canada in its series Working Papers with number 06-6.

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Length: 52 pages
Date of creation: 2006
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Handle: RePEc:bca:bocawp:06-6

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Related research
Keywords: Monetary aggregates;

Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hafer, R W & Kutan, A M, 1997. "More Evidence on the Money-Output Relationship," Economic Inquiry, Oxford University Press, vol. 35(1), pages 48-58, January.
  2. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005. [Downloadable!]
    Other versions:
  3. Sean Becketti & Charles Morris, 1992. "Does money matter anymore? A comment on Friedman and Kuttner," Research Working Paper 92-07, Federal Reserve Bank of Kansas City.
  4. Paul D. Gilbert & Lise Pichette, 2003. "Dynamic Factor Analysis for Measuring Money," Working Papers 03-21, Bank of Canada. [Downloadable!]
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  6. 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. [Downloadable!] (restricted)
  7. Swanson, Norman R., 1998. "Money and output viewed through a rolling window," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 455-474, May. [Downloadable!] (restricted)
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    Other versions:
  13. Norman R. Swanson & Jeffery D. Amato, 2000. "The real-time predictive content of money for output," BIS Working Papers 96, Bank for International Settlements. [Downloadable!]
  14. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-93, May. [Downloadable!] (restricted)
    Other versions:
  15. Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, EconWPA, revised 23 Jun 1994. [Downloadable!]
    Other versions:
  16. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
    Other versions:
  17. Christis Hassapis, 2003. "Financial variables and real activity in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 421-442, May. [Downloadable!] (restricted)
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