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Foreign Holdings of Dollars and Information Value of US Monetary Aggregates

Listed author(s):
  • Yunus Aksoy
  • Tomasz Piskorski

Recent empirical research has found that the strong short-term relationship between US monetary aggregates and macroeconomic fundamentals, as outlined in the classical study of M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of B. Friedman and Kuttner (1992) information value approach we reevaluate the vanishing relationship between US monetary aggregates and macroeconomic fundamentals. By using the official US data constructed by Porter and Judson (1996) we find that the currency component of M1 corrected for the foreign holdings of dollars contains valuable information on US macroeconomic fundamentals, such as nominal and real income, as well as inflation. This correction for monetary aggregates is required because the rate of foreign holdings in total money creation is large and unstable. The statistical evidence provided in this paper suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates.

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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces0107.

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Date of creation: Mar 2001
Handle: RePEc:ete:ceswps:ces0107
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