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Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?

  • Arturo Estrella
  • Frederic S. Mishkin

We examine the potential policy role of monetary aggregates by attempting to use them as effectively as possible in the analysis of empirical relationships. We consider three possible roles: as information variables, as indicators of policy actions and as instruments in a policy rule. These require successively stronger and more stable relationships between the aggregates and the final policy targets. Our results show that in the United States since 1979, the monetary aggregates fall considerably short of those requirements, and results with German M3 are hardly more favorable. We also investigate whether empirical relationships are not reflective of causal relationships because of the use of these variables in counter cyclical policy. The results are reasonably consistent with that notion in the case of interest rates, but not in the case of the aggregates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5845.

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Date of creation: Nov 1996
Date of revision:
Publication status: published as Journal of Monetary Economics, Vol. 40, no. 2 (1997): 279-304.
Handle: RePEc:nbr:nberwo:5845
Note: EFG ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Engle, Robert F, 1974. "Band Spectrum Regression," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 1-11, February.
  2. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  3. 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.
  4. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
  5. Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
  6. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  7. 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.
  8. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
  9. Mark W. Watson, 1991. "Using econometric models to predict recessions," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 14-25.
  10. Huizinga, John & Mishkin, Frederic S., 1986. "Monetary policy regime shifts and the unusual behavior of real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 231-274, January.
  11. Gregory D. Hess & David H. Small & Flint Brayton, 1993. "Nominal income targeting with the monetary base as instrument: an evaluation of McCallum's rule," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  12. John P. Judd & Brian Motley, 1991. "Nominal feedback rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 3-17.
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