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The information content of credit aggregates

  • Economics
  • Philosophy


Opinions expressed in the Economic Review do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. The Federal Reserve Bank of San Francisco's Economic Review is published quarterly by the Bank's Research and Public Information Department under the supervision of Joseph Bisignano, Senior Vice President and Director of Research. The publication is edited by Gregory J. Tong, with the assistance of Karen Rusk (editorial) and William Rosenthal (graphics). For free copies of this and other Federal Reserve publications, write or phone the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 974-3234. 2 Bharat Trehan* Knowledge of changes in private credit aggregates is useful in interpreting the money/GNP relationship because it helps to distin- guish shifts in asset demands by households from changes in the demand for transactions balances by firms. This is necessary be- cause both these changes have the same impact on money and in- terest rates but have different implications for future GNP. There exists a large body of work document- ing movements in narrowly defined money (Ml) as leading movements in economic activ- ity. The monetarist tradition regards this as evi- dence of causation, running from money to GNP. However, even casual empiricism sug- gests that this relationship has not been very stable recently. The first example is the sharp decline in the velocity of Ml over the second half of 1982 and the beginning of 1983 (see Judd, 1983, for a discussion). The second ex- ample is the sharp slowdown in the growth rate of money during the second half of 1983 (when money slowed from a 12.4 percent annual rate in the first half to a 7.2 percent rate in the sece ond), which was followed by an unusually high rate of GNP growth in the first half of 1984. (For a more formal analysis of recent shifts in the m

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