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The Empirical Performance of Alternative Monetary and Liquidity Aggregates

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  • Joseph Atta-Mensah

Abstract

This paper examines the empirical performance of alternatives to the monetary aggregates currently published by the Bank of Canada. The results show that real M1 and real M1alpha perform about equally well in providing leading information about real output at short horizons. However, on theoretical grounds, M1alpha is a more attractive aggregate, since it excludes federal government deposits held at trust companies (M1 excludes only such deposits held at banks). Also, the broad aggregates - M2+, M2delta (the sum of M2+, treasury bills, provincial savings bonds, and Canada Savings Bonds), M3beta (the sum of M2delta, mutual funds, 1- to 3-year government bonds, mortgage-backed securities, foreign holders of Canadian dollar deposits, and foreign currency deposits of residents booked in Canada), and LLbeta (the sum of M3beta, bankers' acceptances, and commercial paper issued by non-financial corporations) - generally are the best in providing leading information about inflation at long horizons (one to two years) across the various models that were considered. Also, in the context of P* models of inflation, M1 performs well as a leading indicator of inflation with long leads. Based on the analyses carried out in this paper, the aggregates M1, M1alpha, M2+, M2delta, M3beta and LLbeta are found to be deserving of further attention. N.B.: Greek letters are used for "alpha," "beta," and "delta," in the paper.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9601001.

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Length: 38 pages
Date of creation: 22 Jan 1996
Date of revision:
Handle: RePEc:wpa:wuwpma:9601001

Note: 38 printed pages, compressed PostScript file. Other recent Bank of Canada working papers are listed on the last page of this report.
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  1. Alain DeSerres & Alain Guay & Pierre St-Amant, 1995. "Estimating and Projecting Potential Output Using Structural VAR Methodology," Macroeconomics 9504003, EconWPA.
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Cited by:
  1. Luis Fernando Melo Velandia & Martha Alicia Misas Arango, 2004. "Modelos Estructurales de Inflación en Colombia: Estimación a través de Mínimos Cuadrados Flexibles," BORRADORES DE ECONOMIA 003244, BANCO DE LA REPÚBLICA.
  2. Simon van Norden & Robert Vigfusson, 1996. "Regime-Switching Models: A Guide to the Bank of Canada Gauss Procedures," Econometrics 9603004, EconWPA.
  3. Fillion, J.F., 1996. "L'endettement du Canada et ses effets sur les taux d'interet reels de long term," Working Papers 96-14, Bank of Canada.
  4. Martha Misas & Enrique López & Luis Fernando Melo, . "La Inflación desde una Perspectiva Monetaria: Un Modelo P* para Colombia," Borradores de Economia 133, Banco de la Republica de Colombia.
  5. Pierre St-Amant, 1996. "Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology," Macroeconomics 9602004, EconWPA.
  6. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers 99-5, Bank of Canada.
  7. Atta-Mensah, J, 1996. "A Modified P*-Model of Inflation Based on M1," Working Papers 96-15, Bank of Canada.

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