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Would the addition of bond or equity funds make M2 a better indicator of nominal GDP?

  • John V. Duca

John Duca assesses the possibility that adding bond mutual funds, equity mutual funds, or both to M2 would improve this monetary aggregate's ability to forecast nominal GDP growth. He finds that M2B (M2 plus bond funds) and M2+ (M2 plus bond and stock funds) are statistically significant in explaining past nominal GDP growth. Duca further shows that M2B and M2+ each yield better forecasts of nominal GDP growth since 1990 than does M2, but to a lesser extent when the federal funds rate and the ten-year Treasury note yield are included in his forecasting model. Because bond and equity mutual funds are less directly influenced by the Federal Reserve than M2, Duca cautions that, relative to M2, M2B and M2+ are likely to be less controllable by the Federal Reserve. ; Given these findings, Duca argues that M2B and M2+ show promise as information variables that the Federal Reserve may use along with other economic indicators in setting monetary policy. Recent forecast results and anecdotal information suggest that if equity funds continue to become more substitutable for nontransactions deposits, M2+ may prove to be increasingly helpful in this capacity.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1994/er9404a.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1994)
Issue (Month): Q IV ()
Pages: 1-14

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Handle: RePEc:fip:fedder:y:1994:i:qiv:p:1-14
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  1. James H. Stock & Martin Feldstein, 1994. "Measuring Money Growth When Financial Markets Are Changing," NBER Working Papers 4888, National Bureau of Economic Research, Inc.
  2. Mark A. Wynne, 1993. "Price stability and economic growth," Southwest Economy, Federal Reserve Bank of Dallas, issue May, pages 1-5.
  3. Flint Brayton & P.A. Tinsley, 1993. "Interest rate policies for price stability," Finance and Economics Discussion Series 93-22, Board of Governors of the Federal Reserve System (U.S.).
  4. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  5. Athanasios Orphanides & Brian Reid & David H. Small, 1993. "The empirical properties of a monetary aggregates that adds bond and stock funds to M2," Finance and Economics Discussion Series 93-42, Board of Governors of the Federal Reserve System (U.S.).
  6. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  7. Becsi, Zsolt & Duca, John V., 1994. "Adding bond funds to M2 in the P-Star model of inflation," Economics Letters, Elsevier, vol. 46(2), pages 143-147, October.
  8. Thomas D. Simpson, 1980. "The redefined monetary aggregates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 97-114.
  9. John V. Duca, 1993. "Regulation, bank competitiveness, and episodes of missing money," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Apr, pages 1-23.
  10. Emery, Kenneth M., 1994. "Inflation persistence and Fisher effects: Evidence of a regime change," Journal of Economics and Business, Elsevier, vol. 46(3), pages 141-152, August.
  11. Ben Bernanke, 1990. "On the Predictive Power of Interest Rates and Interest Rate Spreads," NBER Working Papers 3486, National Bureau of Economic Research, Inc.
  12. David H. Small & Richard D. Porter, 1989. "Understanding the behavior of M2 and V2," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 244-254.
  13. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  14. John V. Duca, 1993. "Should bond funds be included in M2?," Research Paper 9321, Federal Reserve Bank of Dallas.
  15. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
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