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A New Empirically Weighted Monetary Aggregate for the United States
Author(s) -
Drake Leigh,
Mills Terence C.
Publication year - 2005
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbi010
Subject(s) - economics , divisia index , divisia monetary aggregates index , monetary policy , aggregate (composite) , inflation (cosmology) , econometrics , bond , stock (firearms) , monetary economics , inflation targeting , credit channel , mathematics , statistics , finance , mechanical engineering , physics , theoretical physics , engineering , materials science , energy (signal processing) , energy intensity , composite material
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.