Series: Working Papers. 9611.
Author: Francisco Alonso, Jorge Martínez Pagés and María Pérez Jurado.
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Abstract
This paper falls under the literature on weighted monetary aggregates that seeks to relax the assumption of perfect substitutability of assets implicit in the use of traditioI).al monetary aggregates. Specifically, using the methodology recently proposed by Feldstein and Stock, an estimation is made of those weights which, when applied to the broad aggregate components result in liquidity growth that is a stable leading indicator of nominal expenditure.
The weighted monetary aggregate obtained provides an acceptable measure of liquidity in the Spanish economy. This aggregate does not reflect a long-run tendency in the velocity of circulation, and the implied weights are consistent with the relative liquidity of its components: the M2 weight is higher than the M3-M2 weight, which, in turn, is higher than ALP2-M3. In turn, the weighted aggregate has more explanatory power for the growth in nominal expenditure than the traditional monetary aggregates. This result also extends, albeit more weakly, to the explanatory power of inflation, measured in terms of the growth in the GDP deflator.