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The stock of money and why you should care

In: Measurement Error: Consequences, Applications and Solutions

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  • Logan J. Kelly

Abstract

In this chapter, I will examine the problems created by incorrectly using a simple sum monetary aggregate (SSUM) to measure the monetary stock. Specifically, I will show that SSUM confounds the current stock of money (CSM) with the investment stock of money (ISM) and that this confounding leads the SSUM to report an artificially smooth monetary stock. This smoothing causes important information about the dynamic movements of the monetary stock to be lost. This may offer at least a partial explanation of why so many studies find that money has little economic relevance. To that end, we will conclude the chapter by examining a reduced form backward looking IS equation to determine whether monetary aggregates contain information about real GDP gap. This chapter differs from previous work in monetary aggregation in that it focuses on smoothing of the monetary stock data caused by the use of simple sum methodology, where the previous work focuses on the bias exhibited by SSUMs.

Suggested Citation

  • Logan J. Kelly, 2009. "The stock of money and why you should care," Advances in Econometrics, in: Measurement Error: Consequences, Applications and Solutions, pages 237-250, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(2009)0000024013
    DOI: 10.1108/S0731-9053(2009)0000024013
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    2. El-Shagi, Makram & Kelly, Logan, 2019. "What can we learn from country-level liquidity in the EMU?," Journal of Financial Stability, Elsevier, vol. 42(C), pages 75-83.
    3. Kelly, Logan J. & Barnett, William A. & Keating, John W., 2011. "Rethinking the liquidity puzzle: Application of a new measure of the economic money stock," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 768-774, April.
    4. Paul, Sunil & Ramachandran, M., 2011. "Currency equivalent monetary aggregates as leading indicators of inflation," Economic Modelling, Elsevier, vol. 28(4), pages 2041-2048, July.
    5. John W. Keating & Logan J. Kelly & A. Lee Smith & Victor J. Valcarcel, 2019. "A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 227-259, February.
    6. El-Shagi, Makram & Giesen, Sebastian & Kelly, Logan J., 2015. "The Quantity Theory Revisited: A New Structural Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 58-78, January.
    7. El-Shagi, Makram & Giesen, Sebastian & Kelly, Logan J., 2012. "Monetary Policy in a World Where Money (Also) Matters," IWH Discussion Papers 6/2012, Halle Institute for Economic Research (IWH).

    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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