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Regime Shifts in the Indicator Properties of Narrow Money in Canada

Tracy Chan, Ramdane Djoudad and Jackson Loi

Staff Working Papers from Bank of Canada

Abstract: Financial innovations and the removal of the reserve requirements in the early 1990s have made the distinction between demand and notice deposits arbitrary. This classification issue has affected those narrow monetary aggregates (gross and net M1) that rely on a proper distinction for their definition, and may have eroded their value as indicators. The authors examine whether the indicator properties of various narrow aggregates for the growth of real output have changed over time. They find evidence of a regime shift in the relationship between real and narrow monetary aggregates and the growth of real output, which seems to have occurred in 1992. More specifically, their results show that real M1+, the definition of which is not based on the distinction between demand and notice deposits, has become a more useful indicator in predicting the growth of real output over the more recent period.

Keywords: Monetary; aggregates (search for similar items in EconPapers)
JEL-codes: E40 E42 E50 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:06-6

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