Academic journal article Federal Reserve Bank of St. Louis Review

A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting

Academic journal article Federal Reserve Bank of St. Louis Review

A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting

Article excerpt

The savings deposit component of M2 includes deposits at commercial banks, MSBs, S&Ls and credit unions. As usual, construction of monetary aggregates requires both gross deposit amounts and, as a netting item, the amounts of deposits held by other money stock issuers. Monthly savings deposit data generally were available beginning in 1968. For prior years, savings deposits often were estimated as a constant share of total deposits, the share itself being estimated from data available circa 1968. The following paragraphs discuss estimates for each type of depositary.

For commercial banks from June 1961 through June 1966, total savings deposits were taken from semiannual and quarterly call reports; monthly values were obtained by interpolation. For July 1966 through January 1968, savings DATA ON THE MONETARY AGGREGATES are the fundamental raw material of research in many facets of economics and finance. Money demand modelling, measurement of money stock announcement effects, tests of the rationality of preliminary money stock forecasts and financial market efficiency, and comparison of alternative seasonal adjustment procedures are just a few such areas. Monetary aggregates also are used by Federal Reserve System staff in formulating policy alternatives for the Federal Open Market Committee (FOMC). Perhaps no government data are more important or more widely used in economic and financial research than the monetary aggregates. Often unappreciated by researchers, however, is the extent to which the appropriate use of monetary aggregates data is intimately connected with changes through time in the data's definitions, construction, revision and publication. A failure to appreciate the interdependence of time, data, definitions and procedures may adversely affect or vitiate research and policy conclusions.

This paper discusses the construction, publication and evolution of monetary aggregates data since the inception of the Federal Reserve System in 1914. In opening their seminal volume on U.S. monetary data, Friedman and Schwartz (1970) set a similar objective:

This book attempts to provide a comprehensive survey of the construction of estimates of the quantity of money in the United States -- an activity that dates back almost to the beginnings of the Republic. The survey covers sources, methods of construction, and the end product.

Friedman and Schwartz present a consistent time series of monetary aggregates based on their own data for 1867-1946 and Federal Reserve data through the mid-1960s. This paper and the companion timeline (Kavajecz, 1994) extend Friedman and Schwartz by reviewing the construction and publication of the Federal Reserve's monetary aggregates from 1960 through 1993. We focus on the years since 1960, the period for which the Federal Reserve Board staff currently publishes official monetary aggregates. The interested reader will find few (if any) available descriptions of the Federal Reserve's monetary aggregates comparable to Friedman and Schwartz's narrative.

The evolution of the monetary aggregates as economic statistics has been influenced by both economic thought and statistical practice.(1) Structural change in financial markets and the introduction of new financial instruments require periodic redefinition of the monetary aggregates to accurately reflect the portfolio choices available to households and firms. Never defined nor constructed in the abstract, however, monetary aggregates exist largely as indicators and/or targets of monetary policy. Thus, to an unknown but perhaps considerable extent, selection of the definitions of the monetary aggregates has been based on the relative ability of alternate aggregates to predict economic activity. Prior to 1980, commercial banks furnished most transaction deposits and their nontransaction deposits seemed to be the closest substitutes for money. In turn, the Federal Reserve's monetary aggregates emphasized both the distinctions between types of deposits and between commercial banks and thrift institutions. …

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