A New Empirically Weighted Monetary Aggregate for the United States

20 Pages Posted: 5 Jun 2006

See all articles by Leigh M. Drake

Leigh M. Drake

Nottingham University Business School

Terence C. Mills

Loughborough University - Department of Economics

Abstract

This article uses an approach to long-run modeling proposed by Pesaran, Shin, and Smith (2001) to develop an empirically weighted broad monetary aggregate for the United States and to demonstrate the advantages of this type of aggregate from a monetary policy perspective. The new empirically weighted aggregate performs well in out-of-sample nominal income and inflation forecasting tests, and in respect of the latter is clearly superior to simple sum M2, Divisia M2, and simple sum M2+ (which includes stock and bond mutual funds) over the period 1991-2001. (JEL E41, E52, E58)

Suggested Citation

Drake, Leigh M. and Mills, Terence C., A New Empirically Weighted Monetary Aggregate for the United States. Economic Inquiry, Vol. 43, Issue 1, pp. 138-157, 2005. Available at SSRN: https://ssrn.com/abstract=906224

Leigh M. Drake (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Terence C. Mills

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain
+44 1509 222703 (Phone)
+44 1509 223910 (Fax)

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