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Forecasting M2 growth: an exploration in real time

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  • Evan F. Koenig

Abstract

Evan Koenig presents a model that has proved successful at reproducing the pattern of M2 growth over the first half of the decade of the 1990s. The model suggests that a large gap between long-term bond yields and M2 deposit rates contributed importantly to the slow money growth that persisted through the end of 1994. The increased availability of bond market mutual funds may also have played a role in the money growth slowdown. The model can be combined with real-time published forecasts of spending and interest rates to yield predictions of future changes in money growth. It has generally performed well in this regard. However, in 1995 a sharp flattening of the yield curve led to a more-pronounced-than-expected acceleration of M2 growth, calling the future forecasting performance of the model into question. Results for an M2 aggregate expanded to include household bond funds are similar.

Suggested Citation

  • Evan F. Koenig, 1996. "Forecasting M2 growth: an exploration in real time," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 16-26.
  • Handle: RePEc:fip:fedder:y:1996:i:qii:p:16-26
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1996/er9602b.pdf
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    References listed on IDEAS

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    1. Joshua N. Feinman & Richard D. Porter, 1992. "The continuing weakness in the M2," Finance and Economics Discussion Series 209, Board of Governors of the Federal Reserve System (U.S.).
    2. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-277, August.
    3. Duca, John V., 1995. "Should bond funds be added to M2?," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 131-152, April.
    4. John B. Carlson & Sharon E. Parrott, 1991. "The demand for M2, opportunity cost, and financial change," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-11.
    5. Duca, John V., 1993. "RTC activity and the 'missing M2'," Economics Letters, Elsevier, vol. 41(1), pages 67-71.
    6. 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 841-858, September.
    7. Koenig, Evan F., 1996. "Long-term interest rates and the recent weakness in M2," Journal of Economics and Business, Elsevier, vol. 48(2), pages 81-101, May.
    8. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters,in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
    9. Friedman, Milton, 1977. " Time Perspective in Demand for Money," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 397-416.
    10. Hamburger, Michael J., 1983. "Recent velocity behavior, the demand for money and monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Dec, pages 108-128.
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    Cited by:

    1. Cara S. Lown & Stavros Peristiani & Kenneth J. Robinson, 1999. "What was behind the M2 breakdown?," Staff Reports 83, Federal Reserve Bank of New York.

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    Keywords

    Money supply;

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