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The Canadian Experience with Weighted Monetary Aggregates

Listed author(s):
  • David Longworth
  • Joseph Atta-Mensah

This paper compares the empirical performance of Canadian weighted monetary aggregates (in particular, Fisher ideal aggregates) with the current summation aggregates, for their information content and forecasting performance in terms of prices, real output and nominal spending for the period 1971Q1 to 1989Q3. The properties of money-demand equations for these aggregates, particularly their temporal stability, are also examined. The major aggregates considered are M1, M2, M3, M2+, and their Fisher ideal counterparts. Also considered are M3+ (which adds near-bank deposits to M3) and two liquidity aggregates, as well as their Fisher ideal counterparts. Over all, on the basis of the in-sample fit of indicator models, the out-of-sample forecasts by indicator models, the specification of money-demand functions, and the temporal stability of money-demand functions, Canadian simple-sum monetary aggregates appear to be empirically superior to Fisher ideal aggregates. Specifically, broad monetary aggregates are generally the best in predicting inflation, M1 works well in predicting nominal spending, and real M1 is the best predictor of real output. These conclusions generally agree with earlier studies, which have shown that weighted monetary aggregates rarely do better than simple-sum aggregates in predicting major Canadian macroeconomic variables.

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Paper provided by EconWPA in its series Econometrics with number 9511001.

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Length: 65 pages
Date of creation: 16 Nov 1995
Handle: RePEc:wpa:wuwpem:9511001
Note: 65 printed pages, compressed PostScript file. Other recent Bank of Canada working papers are listed on the last page of this report.
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