FINANCIAL SECTOR WEAKNESS AND THE M2 VELOCITY PUZZLE

Deterioration in the link between M2 and GDP, along with large prediction errors, led the Federal Reserve to downgrade M2 as a reliable indicator in 1993. We argue that the financial condition of depository institutions was a major factor behind this unusual pattern of M2 growth. When constructing m...

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Bibliographic Details
Published in:Economic inquiry 2006-10, Vol.44 (4), p.699-715
Main Authors: LOWN, CARA, PERISTIANI, STAVROS, ROBINSON, KENNETH J.
Format: Article
Language:English
Subjects:
Aggregates
Banks
Central banks
Cointegration analysis
Deposit banking
Depository Institutions Deregulation & Monetary Control Act 1980-US
Economic aspects
Economic growth
Economic indicators
Equity funds
Financial institutions
Financial performance
Financial services
Forecasting
Forecasting techniques
GDP
Gross Domestic Product
Interest rates
Laws, regulations and rules
Monetary policy
Money demand
Money market deposit accounts
Money supply
Opportunity costs
Savings & loan associations
Studies
Variables
Citations: Items that this one cites
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Summary:Deterioration in the link between M2 and GDP, along with large prediction errors, led the Federal Reserve to downgrade M2 as a reliable indicator in 1993. We argue that the financial condition of depository institutions was a major factor behind this unusual pattern of M2 growth. When constructing measures of M2 based on banks' and thrifts' capital positions, we obtain superior M2 forecasting results and a more stable relationship between M2 and the ultimate goals of policy. M2 may contain useful information when there are no major disturbances to depository institutions. (JEL E4, E5, G2)
ISSN:0095-2583
1465-7295
DOI:10.1093/ei/cb1009