Building New Monetary Services Indices: Concepts, Methodology and Source Data

Abstract

This paper is second oftwo from the Monetary Services Indices (MSI) Project at the Federal Reserve Bank ofSt. Louis. The first paper, Working Paper 96-007B, surveys the microeconomic theory ofthe aggregation ofmonetary assets. This paper describe a new database ofmonetary services indices (MSI) for the United States. The MSI measure the flow of monetary services received each period by households from their holdings ofmonetary assets; the levels ofthe indices are often also referred to as Divisia monetary aggregates. Inaddition to indicesof the flow ofmonetary services, the database contains dual user cost indices, measures ofpotential aggregation error in the monetary services indices, and measures ofthe stock ofmonetary wealth. An overview ofthe Project and the concept ofmonetary aggregation is included here as a preface.

A Comprehensive Revision of the U.S. Monetary Services (Divisia) Indexes

“…The focus is largely, but . not exclusively, on aspects of the MSI that differ substantively from our earlier work (Anderson, Jones, and Nesmith, 1997c). We caution readers that this section is necessarily detail oriented, but understanding the details, though sometimes tedious, is essential if the MSI are to be used intelligently in economic research and policymaking.…”

“…The next section provides a brief over -view of the theory behind the MSI. We then describe the MSI and their changes relative to Anderson, Jones, and Nesmith (1997c). Next, we examine the empirical properties of the MSI, emphasizing the time-series behavior of the indexes.…”

“…The data used in these studies to separate demand deposits into household and business components are not available after June 1990 (see Thornton and Yue, 1992, p. 46). Consequently, Anderson, Jones, and Nesmith (1997c) adopted an alternative procedure, assuming that the implicit rate of return on demand deposits was a fraction of the fully competitive return and applying that own rate to total demand deposits.…”

“…A key issue in constructing the MSI is that deposits were subject to interest rate ceilings under Regulation Q; our discussion here draws on Gilbert (1986). Generally speaking, Anderson, Jones, and Nesmith (1997c) assumed that the interest rate ceilings were binding and used them to form own rates for the components of the MSI going back to 1960. According to Gilbert (1986, p. 26), however, this was typically not the case before 1966:…”

Which Road Leads to Stable Money Demand?

“…High‐quality US data on monetary services produced from Divisia aggregation are about to become available from the Federal Reserve Bank of St Louis and will be updated and maintained routinely in the future. The procedures used in generating those data, which are superior to earlier Divisia data available for the United States, are described in Anderson et al (1996a, b). The data themselves are available online from the St Louis Federal Reserve Bank's web site, FRED.…”