Abstract

Are Interest-Weighted Monetary Aggregates Easier to manage than Traditional Ones?

This study measures the liquidity services provided by various monetary assets in terms of user costs, i.e. in terms of the interest that would arise to market participants when holding non-monetary assets instead of monetary ones. In order to aggregate monetary assets with the help of Cobb-Douglas and CES functions, the parameters of theses functions, constant over time, are estimated with the help of data pertaining to the monetary assets and to the user costs. Time variableweighted Törngvist aggregates are directly ascertained from the quantitative and the price data. Manageability is interpreted to mean the accuracy with which the central bank is able to forecast future money supply trends. To begin with, the money supply multipliers calculated on the basis of various interest-weighted and traditional monetary aggregates are explained with the help of univariate Box- Jenkins models. Thereafter, transfer function models help to make additional use of the information that is included in the monetary base or the money-market interest rates. The results of the three prognosticating variants are not uniform. However, if it is assumed - which is realistic - that the Bundesbank attempts to manage money market interest rates instead of the monetary base, the sum aggregates turn out to be easier to manage. From among the interest-weighted monetary aggregates, the ones based on Cobb-Douglas functions are the easiest to prognosticate of all of the variants examined.