A New Empirically Weighted Monetary Aggregate for the United States |
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Authors: | Leigh Drake Terence C. Mills |
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Affiliation: | Drake:;Professor, Nottingham University Business School, Jubilee Campus, Nottingham, NG8 1BB, UK. Phone 44 (0) 1159 846 7415, Fax 44 (0) 115 846 6667, E-mail Mills:;Professor, Department of Economics, Loughborough University, Loughborough, LE11 3TU, UK. |
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Abstract: | 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. |
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