Measuring Money Growth When Financial Markets Are Changing

James Stock and Martin Feldstein

No 4888, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E44 E51 (search for similar items in EconPapers)
Date: 1994-10
Note: IFM ME EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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

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Journal Article: Measuring money growth when financial markets are changing (1996)
Working Paper: Measuring Money Growth When Financial Markets are Changing (1996)
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