Money, Output, and Prices: Evidence From a New Monetary Aggregate

Abstract

This article derives a new utility-based monetary aggregate, the currency-equivalent (CE) aggregate. It equals the stock of currency that would be required for households to obtain the liquidity services that they get from their entire collection of monetary assets. This aggregate is derived from preferences assuming that these satisfy a separability assumption in addition to satisfying the requirements for Divisia aggregation. The resulting aggregate remains valid when asset characteristics change and equals the sum of individuals' CE holdings. It also predicts output movements better than simple-sum aggregates such as M1 and M2.

KEY WORDS:

• Aggregation
• Divisia aggregation
• Monetary policy
• Money-income causality