NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Measuring Money Growth When Financial Markets Are Changing

James H. Stock, Martin Feldstein

NBER Working Paper No. 4888
Issued in October 1994
NBER Program(s):   IFM   ME   EFG

This paper examines the problem of measuring the growth of a monetary aggregate in the presence of innovations in financial markets and changes in the relationship between individual assets and output. We propose constructing a monetary aggregate so that it is a good leading indicator of nominal GDP; in general the weights on its components vary over time. We investigate two specific procedures: one in which subaggregates discretely switch in and out, and one in which the growth of the aggregate is a time-varying weighted average of the growth of the subaggregates, where the weights follow a random walk. These procedures are used to construct aggregates which potentially augment M2 with stock and/or bond mutual funds. Over 1960-1991, the time-varying aggregates look much like M2, but during 1992-93 the time-varying aggregates outperform M2.

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Document Object Identifier (DOI): 10.3386/w4888

Published: Journal of Monetary Economics, Volume 37, Issue 1, February 1996, Pages 3-27 citation courtesy of

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