Monetary Aggregation: A Reconciliation of Theory and Central Bank Practice

Abstract

Monetary assets have different characteristics which make them more or less useful in facilitating transactions. Academic economists have consistently argued that these differences should be incorporated in monetary aggregates by assigning assets different weights. However, central banks continue to use conventional aggregates with equal weights for all assets. For a transactions model of money, which the academic view implicitly embodies, weighted aggregates, although imperfect, are certainly superior. However, once this structural model is abandoned in favor of alternatives where monetary assets play a different role, central banks` continued use of simple sum measures of money may be justified.

JEL Classification: C3, E51, E52, E58