The current stock of money: an aggregation theoretic measure of narrowly defined money

Abstract

While the usual definition of narrowly defined money is in terms of grouping of assets to be included in the aggregate, the Current Stock of Money (CSM) focuses on the function of those assets. By isolating the portion of each monetary asset that functions as currency, the CSM measures the amount of currency needed to provide an equal level of monetary service to that of the current monetary portfolio. This makes the CSM suitable for use in any model that contains currency, that is, narrowly defined money. Thus, the main contributions of this research are to derive the CSM and to show that the Currency Equivalent (CE) index is an unbiased measure of the CSM.

Notes

¹The CE was first proposed by Hutt (1963) and was formally derived by Rotemberg et al. (1995) under perfect foresight.

²Barnett (1991) defines the ESM under perfect certainty from the discounted Fisherine wealth constraint, where the representative consumer's current period intertemporal utility function, u _t , is assumed to be weakly separable in each period's consumption of goods and monetary assets and the planning horizon is of length T.

³See Barnett (1978) for the first derivation of the UC of money.

⁴See Blanchard and Fischer (1989) section 6.3 and Cochrane (2005).

⁵For further information on the forecasting methodology used, see Kelly (2007).

⁶The results are generated using Ox version 4.00 (Doornik, 2006). See http://www.doornik.com for further information.

⁷ See Kelly (2009) for an analysis of the relationship between the official monetary stock aggregates and the CSM.