In recent years, however, such a monetary aggregation procedure was questioned and explicit attention was focused on the use of microeconomic and aggregation-theoretic foundations in the construction of monetary aggregates
This article concludes that the Federal Reserve and ECB differ in their approach to the monetary aggregates
for two main reasons.
Is the velocity of circulation of other monetary aggregates
more stable than the velocity of M1?
In particular, we argue that technological innovation and changes in regulatory practices in the past two decades have made other monetary aggregates
as liquid as M1, so that the measure of money should be adjusted accordingly.
What is required is a monetary aggregate
that can endogenously respond to changes in wealth holder preferences, possibly caused by financial innovations, which impinge on the information content of monetary aggregates
or their sub components.
The research, using interest rates in addition to monetary aggregates
as an indicator for monetary policy, provides support for a monetary source for the economic contraction.
Recent research into the construction of monetary aggregates
(see the Barnett 2nd Serletis collected volume for the United States) attributes the breakdown in demand for money functions during the 1980s to the use of conventional official simple sum aggregates.
9) It involves five main elements: 1) the public announcement of medium-term numerical targets for inflation; 2) an institutional commitment to price stability as the primary goal of monetary policy, to which other goals are subordinated; 3) an information inclusive strategy in which many variables, and not just monetary aggregates
or the exchange rate, are used for deciding the setting of policy instruments; 4) increased transparency of the monetary policy strategy through communication with the public and the markets about the plans, objectives, and decisions of the monetary authorities; and 5) increased accountability of the central bank for attaining its inflation objectives.
Broader definitions of money, namely the M2 and M3 monetary aggregates
, provide results that suggest a relatively close relationship between money and inflation over a "long run" as short as four years.
Last year, these monetary aggregates
far overshot the upper bounds of their annual ranges.
The member said a reduction in reserve requirement ratios would have a limited effect in directly easing monetary conditions, but added "it would lead to greater lending capacity of financial institutions and thereby to increased monetary aggregates
The paper reports little evidence in support of the superiority of the Divisia monetary aggregates
Second, monetary aggregates
can be measured quite accurately with short lags (in the case of the United States, for example, measures of the monetary aggregates
appear within two weeks).
The admissible collections of assets are then combined using Divisia aggregation in order to produce monetary aggregates
which are consistent with economic aggregation theory.
It is now widely acknowledged that financial markets deregulation and financial innovations have significantly altered the relationship between monetary aggregates
and macroeconomic goals such as output and price stability.