Changes in the Indicator Properties of Narrow Monetary Aggregates

Abstract

Although many countries have abandoned monetary targeting in recent decades, monetary aggregates are still useful indicators of future economic activity. Past research has shown that, compared with other monetary aggregates and expressed in real terms, net M1 and gross M1 have traditionally provided superior leading information for output growth. Yet financial innovations and the elimination of reserve requirements over the past two decades have made it increasingly difficult for financial institutions to differentiate between demand and notice deposits, suggesting the need to re-examine the information content of narrow monetary aggregates that depend on such a distinction. Based on an analysis over a sample period from 1975Q1 to 2005Q1, the authors determine that the leading-indicator properties of the narrow monetary aggregates for output growth have shifted over time and that, since 1993, real M1+ has become a better indicator of future output growth than real gross and net M1.