Do Currency Equivalent Monetary Aggregates Have an Edge over Their Simple Sum Counterparts?

Abstract

The currency equivalent (CE) monetary aggregates are interpreted as aggregation theoretic money stock measures by Rotemberg et al. ( 1995 ), Barnett ( 1991 ) and Kelly ( 2009 ) and are far more superior to simple sum aggregates as a policy variable. In this context, the components of four official measures of monetary constructs—M1, M2, M3 and L1—are used to construct monthly CE monetary aggregates for the period from April 1993 to June 2009. Quarterly estimates of CE aggregates are also obtained by taking quarterly averages of monthly aggregates. The empirical evidences in terms of information content, velocity behaviour and cyclical behaviour show that there is a potential gain of using CE aggregates as compared to their sum counterparts in applications of policy interest. JEL Classification: C43 E49