The stock of money and why you should care

In this chapter, I will examine the problems created by incorrectly using a simple sum monetary aggregate (SSUM) to measure the monetary stock. Specifically, I will show that SSUM confounds the current stock of money (CSM) with the investment stock of money (ISM) and that this confounding leads the SSUM to report an artificially smooth monetary stock. This smoothing causes important information about the dynamic movements of the monetary stock to be lost. This may offer at least a partial explanation of why so many studies find that money has little economic relevance. To that end, we will conclude the chapter by examining a reduced form backward looking IS equation to determine whether monetary aggregates contain information about real GDP gap. This chapter differs from previous work in monetary aggregation in that it focuses on smoothing of the monetary stock data caused by the use of simple sum methodology, where the previous work focuses on the bias exhibited by SSUMs.