Lecture 6: Measuring Money Mishkin chapter 3 – part B Page 57-63

Review def. of money 3 functions – lower transaction cost evolution of money quiz

Why do we care about measuring money – in the society Monetary policy: policy about money supply and interest rate. Money supply in the short-run affects interest rate and in the long-run affect macro-econ variables such as GDP, price level, etc. The Fed has some ability to manipulate and control the money supply, but the first step to measure it.

Money measurement Theoretical approaches: focuses the degree to which assets function as mediums of exchange "weighted aggregate" approach Empirical approach: base on which measure of money works best in helping to predict the movements of key macro variables.

Actual practice in the U.S.

Actual practice in the U.S. – cont’d M1 contains highly liquid assets that are directly usable as mediums of exchange (theoretical approach 1). As new forms of money-like instruments emerge, the Feb adopts broader measures of M2 and M3. M1 and M2 sometimes move together, sometimes don’t.

How reliable is the money data? There is difference between initially published data and revisions. Difference is because: small depository institutions report infrequently seasonal adjustments Differences average out to zero  pay more attention with longer-run movements.

Recap Measuring the Money Supply: Actual Practice in the U.S. Reliability of U.S. Monetary Data Quiz