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Monetary aggregates, payments technology, and institutional factors

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  • David J. Petersen

Abstract

Economic theory implies that the quantity of money in the economy is linked both to the Federal Reserve's policy-making instruments and its ultimate objectives and should therefore be useful in formulating policy decisions. The Federal Reserve defines monetary aggregates, composed of financial assets like cash and demand deposits, expressly for this purpose. ; Over time, substantial changes have been observed in the close relationships between monetary aggregates and economic activity. Between 1990 and 1994, growth in the Federal Reserve's M2 monetary aggregate was much slower than expected, a development that several academic studies attribute to the proliferation of financial assets that serve as alternatives to M2 components. As a result, the current composition of M2 no longer completely reflects the choice of financial assets available as means of payment or close substitutes. Thus, the aggregate's relationship with expenditure on goods and services may no longer be direct or predictable, and M2 may not now serve as a reliable link between policy instruments and policy goals. In addition, unforeseen instability in the macroeconomic relationships between monetary aggregates and the Federal Reserve's goals raises broader questions about the role of aggregates in policy making. ; This article explores how the composition and character of payments assets can change in a dynamic financial system, ultimately influencing the relationships between monetary aggregates and economic activity.

Suggested Citation

  • David J. Petersen, 1995. "Monetary aggregates, payments technology, and institutional factors," Economic Review, Federal Reserve Bank of Atlanta, vol. 80(Nov), pages 30-37.
    • Handle: RePEc:fip:fedaer:y:1995:i:nov:p:30-37:n:v.80no.6
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    Cited by:

    1. Thornton, Saranna Robinson, 2000. "How do broader monetary aggregates and divisia measures of money perform in McCallum's adaptive monetary rule?," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 181-204.
    2. Thornton, Saranna R., 1998. "Suitable policy instruments for monetary rules," Journal of Economics and Business, Elsevier, vol. 50(4), pages 379-397, July.
    3. Gauger, Jean, 1998. "Economic Impacts on the Money Supply Process," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 553-577, July.
    4. Binswanger, Mathias, 1997. "The finance process on a macroeconomic level from a flow perspective: A new interpretation of hoarding," International Review of Financial Analysis, Elsevier, vol. 6(2), pages 107-131.

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    Keywords

    Monetary policy; Money;

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