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The case of the "missing M2."



No. 9202 THE CASE OF THE "MISSING M2" by John V. Duca March 1992 Research Paper Federal Reserve Bank of Dallas This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected]) The Case of the olt l i ssi ng M2" John V. Duca* Sen ior Economis t and Po l icy Adv isor Federal Reserve Bank of Dallas Dallas, IX 75222, USA November 1991(revi sed, February 1992 ) -I would l ' i ke to thank, without implicating, Steven Prue and Matthew Turner fo r p rov id ing exce l len t research ass is tance, and R ichard G. Anderson, Mjchae l Cox, Ken Emery, Evan Koenig, Harvey Rosenblum, David Small , Pat l lhj te, and Kev in Yeats fo r the j r suggest ions dur ing the progress o f th is research . The views expressed are those of the author and do not necessari ly ref lect those of the Federal Reserve Bank of Dallas, the Federal Reserve System, or any other Federal Reserve staff member. Any remaining errors are my own. The Gase of the nl'li ssi ng il2" lbstract Since 1990:Q3, U.S. l i '12 growth has been weaker than predicted. This s tudy assesses whether th is "miss ing M2" i s assoc ia ted w i th in f lows in to bond and equity mutual funds or the thri f t resolut ion process. RTC procedures can depress M2 in ways not ref lected in standard models because they force an early cal l of small t ime deposits and impart a prepayment r isk to small t ime deposits. This study f inds that, although some port ion of bond funds are good subst j tu tes fo r M2, bond and/or equ i ty funds cannot exp la in the "miss ing M2. " Most o f the "miss ing M2" ins tead appears re la ted to RTC ac t iv i t y . JEL C lass i f i ca t ion Codes: E4 l . E51. E52 There has been a growing body of evidence that the demand for M2 is more predictable than the demand for l t l l (e.9., Hetzel and l ' lehra (1989), and Moore, Porter, and Small (1990)). Not surprisingly,

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