Measuring Money Growth When Financial Markets are Changing

54 Pages Posted: 16 May 2011

See all articles by James H. Stock

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: October 1994

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.

Suggested Citation

Stock, James H. and Feldstein, Martin S., Measuring Money Growth When Financial Markets are Changing (October 1994). NBER Working Paper No. w4888, Available at SSRN: https://ssrn.com/abstract=1839145

James H. Stock (Contact Author)

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Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased)

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United States
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Harvard University (deceased)

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United States
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