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Money, Output and Prices: Evidence from A New Monetary Aggregate

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  • Julio J. Rotemberg
  • John C. Driscoll
  • James M. Poterba

Abstract

This paper develops a new utility-based monetary aggregate which we label the currency equivalent aggregate. This aggregate equals the stock of currency that would be required for households to obtain the same liquidity services that they get from their entire collection of monetary assets. We compare the ability of the new aggregate and conventional aggregates, such as Ml and M2, and other indicators of monetary policy to forecast real activity. The CE aggregate has more predictive power for output and prices than standard aggregates, and the time path of the estimated output response is more consistent with broad classes of theoretical models.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3824.

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Date of creation: Aug 1991
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Publication status: published as Journal of Business and Economic Statistics, 13 (January 1995), pp. 67-83.
Handle: RePEc:nbr:nberwo:3824

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  1. Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(5), pages 875-908, October.
  2. Stock, James H. & Watson, Mark W., 1989. "Interpreting the evidence on money-income causality," Journal of Econometrics, Elsevier, Elsevier, vol. 40(1), pages 161-181, January.
  3. Spindt, Paul A, 1985. "Money Is What Money Does: Monetary Aggregation and the Equation of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(1), pages 175-204, February.
  4. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 154, Board of Governors of the Federal Reserve System (U.S.).
  5. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(1), pages 40-58, February.
  6. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, Elsevier, vol. 14(1), pages 11-48, September.
  7. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 871-80, December.
  8. Bennett T. McCallum, 1983. "On Low-Frequency Estimates of "Long-Run" Relationships in Macro- economics," NBER Working Papers 1162, National Bureau of Economic Research, Inc.
  9. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, Elsevier, vol. 4(2), pages 115-145, May.
  10. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
  11. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(1), pages 3-24, February.
  12. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 1005-14, December.
  13. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 363-80, June.
  14. Barnett, William A & Offenbacher, Edward K & Spindt, Paul A, 1984. "The New Divisia Monetary Aggregates," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(6), pages 1049-85, December.
  15. Serletis, Apostolos, 1988. "The Empirical Relationship between Money, Prices, and Income Revisite d," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 6(3), pages 351-58, July.
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