The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
November 24, 2005
More Ado About M3
The fallout continues from the Federal Reserve Board's recent announcement that they will soon discontinue publication of the M3 monetary aggregate, and many of its components. Tom Iacono -- who must surely need a new name for his blog any day now -- has a good review of recent commentary on the subject. (A tip of the hat to Dave Iverson.) I'm still somewhat surprised by the sentiment that the Board's decision is, at least in part, motivated by the desire to downplay a statistic that appears to be contradictory to the achievement of price stability. I'm surprised because such sentiment seems to imply that the FOMC places significant weight on the behavior of monetary statistics in the first place!
Let's go back in time, to the July 1993 Monetary Policy Report to the Congress. Here is what Chairman Greenspan had to say in his testimony:
... at least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place.
By July 2000, this footnote appeared in the written report:
At its June meeting, the FOMC did not establish ranges for growth of money and debt in 2000 and 2001. The legal requirement to establish and to announce such ranges had expired, and owing to uncertainties about the behavior of the velocities of debt and money, these ranges for many years have not provided useful benchmarks for the conduct of monetary policy. Nevertheless, the FOMC believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions, and this report discusses recent developments in money and credit in some detail
"Velocity" represents the number of times the stock of money turns over in support of spending, and it is the key piece of information policymakers need to to connect monetary measures to objectives. (You can read a bit more about the theory here.) In short, if you can't predict velocity, you really cannot predict how changes in the money supply will impact the rate of inflation.
With that thought in mind, the following picture of M2 velocity helps to explain why monetary statistics have been "downgraded " in monetary policy deliberations:
The lines represent the trends in velocity -- and the changes in those trends -- identified by formal statistical tests. If you are interested in the formal details of these calculations, you can look them up in a paper by John Calrson, Ben Craig, and Jeff Schwartz that describes the methodology. But you can also just believe your own lyin' eyes, which will tell you, I think, that velocity has not been very predictable over the past decade-and-a-half.
I would have shown you a picture of M3 velocity instead of M2 velocity, but for one problem. One way to think about velocity is that it represents the part of money demand that is sensitive to changes in interest rates. Estimating trends requires some estimate of the return on the monetary measure (so it can be compared to the return on nonmonetary assets -- giving us an idea of the "opportunity cost" of holding money). To the best of my knowledge, no regular estimate of the return to M3 is even available. That alone speaks volumes.
So here's my last word on the subject. If you have a sense that M3 is providing any information at all related to the objectives of monetary policy, you know something I don't know.
For all of you in the States -- or whose hearts are in the States -- Happy Thanksgiving.
November 24, 2005 | Permalink
TrackBack URL for this entry:
Listed below are links to blogs that reference More Ado About M3 :
- Hitting a Cyclical High: The Wage Growth Premium from Changing Jobs
- Thoughts on a Long-Run Monetary Policy Framework, Part 4: Flexible Price-Level Targeting in the Big Picture
- Thoughts on a Long-Run Monetary Policy Framework, Part 3: An Example of Flexible Price-Level Targeting
- Thoughts on a Long-Run Monetary Policy Framework, Part 2: The Principle of Bounded Nominal Uncertainty
- Thoughts on a Long-Run Monetary Policy Framework: Framing the Question
- What Are Businesses Saying about Tax Reform Now?
- A First Look at Employment
- Weighting the Wage Growth Tracker
- GDPNow's Forecast: Why Did It Spike Recently?
- How Low Is the Unemployment Rate, Really?
- April 2018
- March 2018
- February 2018
- January 2018
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- May 2017
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth