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The Stock of Money and Why You Should Care

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  • Kelly, Logan J

Abstract

In this paper, I will examine the problems created by incorrectly using a simple sum monetary aggregate to measure the monetary stock. Specifically, I will show that simple sum monetary aggregate confounds the current stock of money with the investment stock of money and that this confounding leads the simple sum monetary aggregate to report an artificially smooth monetary stock. This smoothing causes important information about the dynamic movements of the monetary stock to be lost. This may offer at least a partial explanation of why so many studies find that money has little economic relevance. To that end, we will conclude the paper by examining a reduced form backward looking IS equation to determine whether monetary aggregates contain information about real GDP gap. This paper differs from previous work in that it focuses on smoothing of the monetary stock data caused by the use of simple sum methodology, where the previous work focuses on the bias exhibited by simple sum monetary aggregates.

Suggested Citation

  • Kelly, Logan J, 2008. "The Stock of Money and Why You Should Care," MPRA Paper 11455, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11455
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    File URL: https://mpra.ub.uni-muenchen.de/11912/2/MPRA_paper_11912.pdf
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    References listed on IDEAS

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    1. William A. Barnett & Unja Chae & John W. Keating, 2011. "The Discounted Economic Stock of Money with VAR Forecasting," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, chapter 4, pages 107-150, World Scientific Publishing Co. Pte. Ltd..
    2. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-257, May.
    3. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May.
    4. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting \"M\" back in monetary policy," International Finance Discussion Papers 761, Board of Governors of the Federal Reserve System (U.S.).
    5. Kelly, Logan J, 2008. "The Currency Equivalent Index and the Current Stock of Money," MPRA Paper 7176, University Library of Munich, Germany.
    6. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, vol. 46(3), pages 417-442, March.
    7. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, University Library of Munich, Germany.
    8. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, University Library of Munich, Germany.
    9. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting \\"M\\" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
    10. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
    11. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    12. Allan H. Meltzer, 2001. "The Transmission Process," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 3, pages 112-130, Palgrave Macmillan.
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    Citations

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    Cited by:

    1. El-Shagi, Makram & Kelly, Logan, 2019. "What can we learn from country-level liquidity in the EMU?," Journal of Financial Stability, Elsevier, vol. 42(C), pages 75-83.
    2. Kelly, Logan J. & Barnett, William A. & Keating, John W., 2011. "Rethinking the liquidity puzzle: Application of a new measure of the economic money stock," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 768-774, April.
    3. Paul, Sunil & Ramachandran, M., 2011. "Currency equivalent monetary aggregates as leading indicators of inflation," Economic Modelling, Elsevier, vol. 28(4), pages 2041-2048, July.
    4. John W. Keating & Logan J. Kelly & A. Lee Smith & Victor J. Valcarcel, 2019. "A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 227-259, February.
    5. El-Shagi, Makram & Giesen, Sebastian & Kelly, Logan J., 2015. "The Quantity Theory Revisited: A New Structural Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 58-78, January.
    6. El-Shagi, Makram & Giesen, Sebastian & Kelly, Logan J., 2012. "Monetary Policy in a World Where Money (Also) Matters," IWH Discussion Papers 6/2012, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    Monetary Aggregation; Money Stock; Currency Equivalent Index;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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