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- Title
FINANCIAL SECTOR WEAKNESS AND THE M2 VELOCITY PUZZLE.
- Authors
LOWN, CARA; PERISTIANI, STAVROS; ROBINSON, KENNETH J.
- Abstract
Deterioration in the link between M2 and GDP, along with large prediction errors, led the Federal Reserve to downgrade M2 as a reliable indicator in 1993. We argue that the financial condition of depository institutions was a major factor behind this unusual pattern of M2 growth. When constructing measures of M2 based on banks' and thrifts' capital positions, we obtain superior M2 forecasting results and a more stable relationship between M2 and the ultimate goals of policy. M2 may contain useful information when there are no major disturbances to depository institutions.
- Subjects
BANKING industry; ECONOMIC indicators; GROSS domestic product; FINANCIAL performance; FINANCIAL management; CORPORATION reports; BUSINESS forecasting; ECONOMIC statistics; ECONOMIC development
- Publication
Economic Inquiry, 2006, Vol 44, Issue 4, p699
- ISSN
0095-2583
- Publication type
Article
- DOI
10.1093/ei/cb1009