The Empirical Performance of Alternative Monetary and Liquidity Aggregates
This paper examines the empirical performance of alternatives to the monetary aggregates currently published by the Bank of Canada. The results show that real M1 and real M1alpha perform about equally well in providing leading information about real output at short horizons. However, on theoretical grounds, M1alpha is a more attractive aggregate, since it excludes federal government deposits held at trust companies (M1 excludes only such deposits held at banks). Also, the broad aggregates - M2+, M2delta (the sum of M2+, treasury bills, provincial savings bonds, and Canada Savings Bonds), M3beta (the sum of M2delta, mutual funds, 1- to 3-year government bonds, mortgage-backed securities, foreign holders of Canadian dollar deposits, and foreign currency deposits of residents booked in Canada), and LLbeta (the sum of M3beta, bankers' acceptances, and commercial paper issued by non-financial corporations) - generally are the best in providing leading information about inflation at long horizons (one to two years) across the various models that were considered. Also, in the context of P* models of inflation, M1 performs well as a leading indicator of inflation with long leads. Based on the analyses carried out in this paper, the aggregates M1, M1alpha, M2+, M2delta, M3beta and LLbeta are found to be deserving of further attention. N.B.: Greek letters are used for "alpha," "beta," and "delta," in the paper.
|Date of creation:||22 Jan 1996|
|Note:||38 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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- Alain DeSerres & Alain Guay & Pierre St-Amant, 1995. "Estimating and Projecting Potential Output Using Structural VAR Methodology," Macroeconomics 9504003, EconWPA.