July 1979
REDEFINING THE MONETARY
AGGREGATES
by Stuart C. Hoffman
Recent financial innovations and regulatory changes have
eroded the usefulness of current monetary aggregate
definitions
as guides to monetary policy. New definitions, proposed by the
staff of the Fed's Board of Governors, are designed to remedy
some of the shortcomings of current money measures.
In an article in the January Federal Reserve
Bulletin, the Board of Governors
staff
proposed
new definitions
for the
monetary
aggregates.
To promote
better
public
awareness
and understanding
of this important issue, this article highlights
those
proposals
and the factors
necessitating
a major overhaul of the current
monetary
measures.
W h e n a pathologist wants to e x a m i n e
an organism, he slices it o p e n and peers
k n o w i n g l y , usually t h r o u g n a m i c r o s c o p e ,
at the slices. In a w a y , e c o n o m i s t s do
m u c h the same w h e n p e e r i n g at the e c o n o m y . R e c e n t l y , h o w e v e r , o n e of their
e c o n o m i c lenses has b e c o m e a bit c l o u d y .
Since they w e r e i n t r o d u c e d in 1960,
monetary aggregates have b e e n effective
v i e w i n g devices for e c o n o m i s t s e x a m i n i n g
monetary policy. Today's monetary aggregates, h o w e v e r , are b e c o m i n g inadequate
for clear v i e w i n g . N e w definitions and
n e w aggregate arrangements are called
for.
T h e Federal Reserve presently uses five
monetary aggregates, i n c l u d i n g the familiar
M i a n d M 2 that n e w s p a p e r a n d television
c o m m e n t a t o r s sometimes refer to, to
measure " m o n e y . " Five different measurements are necessary because, to an e c o n o mist, " m o n e y " exists in different forms.
WHAT IS MONEY? A n asset must possess
two essential qualities to be characterized as
F E D E R A L RESERVE BANK O F A T L A N T A
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" m o n e y . " First, the asset must serve as
a m e d i u m of e x c h a n g e , a generally acceptable means of settling transactions. If
the asset qualifies in this regard, it is a
transactions balance. C a s h , bank c h e c k i n g
accounts, a n d travelers c h e c k s all qualify
as e x a m p l e s of transactions balances.
S o m e assets, w h i l e not themselves media
of e x c h a n g e , can be q u i c k l y a n d easily
c o n v e r t e d to transactions balances with
almost no risk of capital loss. T h e s e
highly liquid assets are r e f e r r e d to by
e c o n o m i s t s as " n e a r - m o n i e s . " Passbook
savings accounts a n d time deposits are
e x a m p l e s of n e a r - m o n i e s .
M o n e y ' s s e c o n d important auality is that
it serves as a store of value. Tnis is simply
its p u r c h a s i n g p o w e r in f u t u r e transactions.
O b v i o u s l y , tnis ability to store value is
inversely related to the rate of inflation.
M e a s u r i n g all forms of m o n e y and nearm o n e y is the f u n c t i o n of the monetary
aggregates.
THE M O N E T A R Y A G G R E G A T E S . Economists have w a t c h e d the m o v e m e n t of all
forms of m o n e y by w a t c h i n g the five
traditional monetary aggregates, M i
t h r o u g h M 5 . T h e different aggregates
are simply c o n v e n i e n t groupings of c u r rency a n a deposits, w h i c h together m a k e
up the m o n e y stock of our e c o n o m y .
T h e Federal O p e n M a r k e t C o m m i t t e e
( F O M C ) closely monitors the t h r e e most
79
July 1979
important aggregates, M-i, M 2 / and M 3 .
These are listed in C h a r t 1. T h e M-, definition includes c u r r e n c y a n d d e m a n d
deposit holdings of the p u b l i c . ( " P u b l i c "
here means e v e r y o n e and e v e r y t h i n g
except banks and the Federal Government.)
Mt is the traditional measure of the a m o u n t
of transactions balances held by the general
public.
Since t i m e and savings deposits are
c o n s i d e r e d as n e a r - m o n i e s , they are
c o u n t e d in the broader aggregate of M 2 .
T h e M 2 d e f i n i t i o n of m o n e y adds the public's time a n d savings deposits held at
c o m m e r c i a l banks to M-j.
T h e M3 definition is a parallel of M 2 .
It adds the public's time and savings deposits at thrift institutions (savings and
loans, mutual savines banks, a n a credit
unions) to the M 2 d e f i n i t i o n .
W H Y ARE THE M O N E T A R Y A G G R E G A T E S
I M P O R T A N T ? C h a r t 2 illustrates a close
historical relationship b e t w e e n the growth
/
\
of M i a n d the s u b s e q u e n t rate of inflation
in c o n s u m e r prices.
T h e average M-i g r o w t h in any year has
its primary effect o n the inflation rate
up to two years later. In the m e a n t i m e ,
that same M-, growth affects p r o d u c t i o n
and e m p l o y m e n t , d e p e n d i n g u p o n the
a m o u n t of excess or idle capacity in the
economy.
T h e F O M C has placed g r o w i n g emphasis
o n the a m o u n t of m o n e y in the e c o n o m y
due to the k n o w l e d g e that m o n e y growth
has a heavy i n f l u e n c e o n price stability,
u n e m p l o y m e n t , and sustained real econ o m i c g r o w t h . T h e monetary aggregates
are essential for the F O M C to track the
g r o w t h of m o n e y .
In 1970, first r e f e r e n c e was made to t h e
F O M C ' s plans for m o n e y growth. By 1974,
the C o m m i t t e e had d e v e l o p e d explicit
n u m e r i c a l t o l e r a n c e ranges for the growth
of m o n e y over a t w o - m o n t h p e r i o d . In
M a y 1975, e x p e c t e d g r o w t h ranges for
a longer p e r i o d of f o u r quarters ahead
a p p e a r e d as F O M C policy. T h e n , in February 1979, t h e C o m m i t t e e a d o p t e d
monetary growth ranges for an entire
CHART 1
TABLE 1
CURRENT MONEY DEFINITIONS
REGULATORY
CHANGES
CREATING
NEW TRANSACTIONS
ACCOUNTS
Negotiable Order of Withdrawal Accounts (NOW)
• New Hampshire and Massachusetts for
mutual savings banks (1972) and commercial
banks and S&Ls (1974)
Savings and Small
Time Deposits
at Nonbank Thrifts
Savings and Small
Time Deposits
• Connecticut, Maine, Rhode Island, and
Vermont for depository institutions
except
CUs (1976)
* New York State for depository
institutions
except CUs (1978)
Credit Union (CU) Share Drafts
#
Federal CUs on experimental basis (1974)
and permanent basis (1978)
- M3
at Banks
- M2
Demand Deposit Accounts at Thrifts
*New York State for thrifts except CUs (1976)
* Nationwide for Federal-chartered
S&Ls
(proposed)
Automatic Transfer Service Accounts (ATS)
Private Demand
Deposits at Banks
-M,
Currency
\
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y
• Nationwide
for commercial
banks (1978)
J U L Y / A U G U S T 1979, E C O N O M I C
REVIEW
July 1979
CHART 2
MONEY AND INFLATION
% CHG. FROM YEAR
Consumer Prices'
EARLIER
— 12
—
'61
4
'79
'66
' C o n s u m e r P r i c e I n d e x l a g g e d 24 m o n t h s .
Note:
B e g i n n i n g N o v e m b e r 1978, M is a d j u s t e d for A T S a n d N O W a c c o u n t s in N e w Y o r k S t a t e .
calendar year, with a midyear r e v i e w in
a c c o r d a n c e with congressional legislation.
W H Y C H A N C E THE A G G R E G A T E S ? Since
1970, w h e n the F O M C first began applying greater i m p o r t a n c e to t h e aggregates,
the c o m p l e x i o n of m o n e y and n e a r - m o n e y
has c h a n g e d . In 1972, t h e r e began a series
of regulatory changes and creations of n e w
financial instruments that have r e d u c e d
the a c c u r a c y of M n as a measure of the
public's transactions balances. A d d i t i o n a l l y ,
certain assets have e m e r g e d as n e w
n e a r - m o n i e s that are not presently inc l u d e d in either M 2 or M 3 , c l o u d i n g the
a c c u r a c y of those aggregates as w e l l .
For c o n v e n i e n c e , the regulatory changes
and financial innovations that have occ u r r e d in the past five years are g r o u p e d
into t h r e e categories: (1) n e w Mq-type
transactions a c c o u n t s ; (2) liquidity changes
of existing n e a r - m o n i e s ; and (3) n e w
near-monies.
NEW TRANSACTIONS A C C O U N T S . Table 1
lists four n e w transactions accounts
a u t h o r i z e d d u r i n g the past several years:
F E D E R A L RESERVE BANK O F A T L A N T A
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negotiable o r d e r of w i t h d r a w a l ( N O W )
a c c o u n t s , credit u n i o n share drafts, d e m a n d
deposits at thrifts, a n d bank automatic
savings-to-demand deposit transfer (ATS)
accounts.
In A p r i l 1979, these accounts totaled
$13 billion—$6.5 billion in A T S accounts,
$5.0 billion in N O W accounts, $0.6 billion
in share drafts, a n d $0.9 billion in d e m a n d
deposits at thrifts.
All but the last pay interest, w h i c h explains their increasing popularity with
the general p u b l i c .
U n f o r t u n a t e l y , the funds in these accounts are not i n c l u d e d in our c u r r e n t
d e f i n i t i o n of M 1 # T h u s , today's M i understates the public's ability to settle
transactions by $13 billion, and the u n d e r statement w i l l g r o w larger as these interesty i e l d i n g a c c o u n t s w i n m o r e and m o r e
p u b l i c a c c e p t a n c e as substitutes for ordinary d e m a n d deposits.
To r e m e d y the g r o w i n g o b s o l e s c e n c e
of the c u r r e n t M-, d e f i n i t i o n , the staff
of t h e Board of G o v e r n o r s in an article in
81
July 1979
the January Federal Reserve Bulletin has
proposed a new M i definition. The
p r o p o s e d M i will i n c l u d e N O W and A T S
a c c o u n t s , share drafts, a n d d e m a n d deposits at thrifts, along with traditional
c o m m e r c i a l bank d e m a n d deposits and
c u r r e n c y held by the p u b l i c (see Table 2). 1
CHART 3
GROWTH RATES OF
CURRENT AND PROPOSED M,
PERCENT
TABLE 2
PROPOSED
M1
|
Current
]
Proposed
Currency
Demand Deposits
)> Current
at Commercial
Banks.
+ NOW
Accounts
+ Share Drafts
+ Demand Deposits at Thrifts
+ ATS Accounts
- Demand Deposits of Certain
Major
Principle:
Include all domestic transactions
to remedy growing obsolescence
current M1 definition.
r
M,
—
6
Foreigners
accounts
of the
1975
1976
1977
1978*
1978-79**
" F i r s t t h r e e q u a r t e r s , a n n u a l rate.
The growth rates of current and proposed
M-, w e r e very similar until A T S accounts
w e r e i n t r o d u c e d in N o v e m b e r 1978 (see
Chart 3). H o w e v e r , f r o m O c t o b e r 1978
t h r o u g h J u n e 1979, c u r r e n t M i g r e w at a
3.0-percent a n n u a l rate and the p r o p o s e d
M i at a 6-percent a n n u a l rate. 2 In either
case, this represents a m a r k e d deceleration
in " m o n e y " growth d u r i n g the past nine
months. Because the c u r r e n t M n is really
an i n c o m p l e t e picture of transactions
balances, it overstates the d e g r e e of slowd o w n . Empirical analyses suggest that the
relationship b e t w e e n G N P a n a the growth
of the p r o p o s e d M-i is marginally closer
than the GNP's relationship with tne current
M v T h e r e f o r e , the p r o p o s e d definitional
c h a n g e s h o u l d e n h a n c e the F O M C ' s
k n o w l e d g e of h o w its policy actions affect f u t u r e e c o n o m i c activity.
' T h e staff h a s a l s o p r o p o s e d to e l i m i n a t e f r o m M , c e r t a i n d e m a n d d e p o s i t s
h e l d by f o r e i g n c o m m e r c i a l b a n k s a n d official institutions, a s r e c o m m e n d e d in
1976 by a n o u t s i d e a d v i s o r y c o m m i t t e e . S e e " I m p r o v i n g the M o n e t a r y
A g g r e g a t e s : R e p o r t of t h e A d v i s o r y C o m m i t t e e o n M o n e t a r y S t a t i s t i c s "
( B o a r d of G o v e r n o r s , J u n e 1976).
' O n l y a s m a l l part of t h i s differential is d u e to t h e e x c l u s i o n of c e r t a i n
foreign-owned demand deposits from proposed M,.
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• • O c t o b e r 1 9 7 8 - J u n e 1979, a n n u a l rate.
L I Q U I D I T Y C H A N G E S IN EXISTING NEARM O N I E S . T h e recent regulatory changes
a n d financial innovations have c o m b i n e d
to increase the liquidity of existing nearmonies, particularly regular passbook
savings a c c o u n t s . Today's regulatory climate permits t e l e p h o n i c transfers f r o m
bank savings to bank c h e c k i n g accounts
and n o n n e g o t i a b l e third-party payments
f r o m savings accounts at both c o m m e r c i a l
banks a n d S&Ls (see Table 3).
A p p a r e n t l y , the p u b l i c is r e s p o n d i n g
to tnese a c c o u n t f r e e d o m s . E v i d e n c e suggests that debits to savings accounts per
dollar of deposit, a m e a s u r e of their "transactions a c t i v i t y , " have increased over the
past several years.
As these permissive regulations have
increased t h e liquidity of savings a c c o u n t s ,
other rule changes w e r e installed that
r e d u c e d the liquidity of t i m e deposits.
T h e s e latter changes permit higher interest
rates payable o n four-, six-, and eightyear certificates a n d , despite a r e c e n t
J U L Y / A U G U S T 1979, E C O N O M I C
REVIEW
July 1979
TABLE 3
REGULATORY
CHANGES
INCREASE
SAVINGS DEPOSIT LIQUIDITY
AND
REDUCE TIME DEPOSIT
LIQUIDITY
Increase Savings Deposit Liquidity
* Telephone transfers from savings to checking accounts at member banks (1975)
• Preauthorized nonnegotiable
third-party
payments from savings accounts at commercial banks and S&Ls (1975)
Reduce Time Deposit
Liquidity
* Maximum interest rate raised on four-year
(1973), six-year (1974), and eight-year (1978)
certificates
#
Substantial interest penalty for early
withdrawal (1973)
• Liberalized interest penalty for early
withdrawal (1979)
liberalization, impose a stiff interest penalty on early w i t h d r a w a l s . Longer maturity
and penalties m e a n a loss of liquidity in
time deposits.
H e r e again, the rule changes have
resulted in a surge of activity in these accounts by the general public. As of O c t o b e r
1978, c o m m e r c i a l bank time deposits w i t h
original maturities of at least four years
a c c o u n t e d for 46 p e r c e n t of smalld e n o m i n a t i o n (less than $100,000) time
deposits, up f r o m 4 p e r c e n t in mid-1973.
At n o n b a n k thrifts, the b o o m in time
deposits has been even more pronounced.
From almost n o n e in mid-1973, four-yeara n d - o v e r original maturity certificates
rose to 67 percent of small time deposits
by S e p t e m b e r 1978.
T h e c u r r e n t M 2 aggregate has b e e n
materially affected by the regulatory
changes a n d the public's positive response
to the n e w rules. Just a f e w years ago,
passbook savings accounts and time
deposits at c o m m e r c i a l banks w e r e sufficiently similar in liquidity that it made
sense to g r o u p t h e m in o n e monetary
aggregate. This is no longer the case.
Savings account deposits are m o r e liquid
today, w h i l e time deposits (except large
negotiable C D s at large banks) are less
liquid.
F E D E R A L RESERVE BANK O F A T L A N T A
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T o c o r r e c t the g r o w i n g inaccuracy of
M 2 , the Board staff proposes to r e d e f i n e
M 2 to i n c l u d e the n e w M-i plus savings
deposits at all depository institutions
(see Table 4). This n e w definition recognizes that similar deposits (like savings
accounts) should be c o m b i n e d regardless
of the depository institution w h e r e they
are held.
TABLE 4
PROPOSED
Proposed M7
+ Savings Deposits at all
Institutions
Major
Principles:
M2
Depository
Separate increasingly liquid savings deposits from less liquid time deposits.
Group together similar types of deposits
regardless of their depository
institutional
location.
NEW N E A R - M O N I E S . In the w a k e of all
the n e w rules and innovations are n e w
highly liquid assets that did not exist a f e w
years ago. Also, the doors to existing nearmonies have b e e n o p e n e d to previously
e x c l u d e d groups.
Table 5 lists these n e w financial instruments: m o n e y market mutual funds,
bank r e p u r c h a s e agreements, m o n e y
market certificates, a n d c o m m e r c i a l bank
savings accounts for state a n d local governments and businesses.
TABLE 5
FINANCIAL INNOVATIONS
CREATE
NEW LIQUID ASSETS
New Highly Liquid Assets
• Money market mutual funds (1974)
• Repurchase agreements between banks and
their business
customers
• Six-month money market certificates at
depository institutions (1978)
New Savings Account
Authorizations
• Commercial bank savings accounts authorized for state and local governments (1974)
and partnerships and corporations (1975)
83
July 1979
Money Market Funds. M o n e y market
mutual funds originated in the high interest rate e n v i r o n m e n t of 1974. T n e s e
funds maintain a portfolio of high-yielding
Treasury bills, c o m m e r c i a l paper, and large
C D s . O w n e r s h i p shares in such funds are
available at a lower m i n i m u m investment
than r e q u i r e d for direct purchases of these
instruments.
Most m o n e y market funds offer an attractive c h e c k w r i t i n g option (usually a
$500 m i n i m u m ) and same-day w i r e transfer
service into a p r e a u t h o r i z e a d e m a n d
deposit a c c o u n t . C o n s e q u e n t l y , these
funds are highly liquid assets that c o u l d
serve as a m e d i u m of e x c h a n g e . H o w e v e r ,
survey e v i d e n c e indicates that the turnover of such a c c o u n t s is substantially lower
than that of transactions accounts. A b o u t
one-half of m o n e y market f u n d assets is
held by institutional investors, about
half of w h i c h is held as investments by
trust accounts.
Part of the reason for e x c l u d i n g m o n e y
market funds f r o m the c u r r e n t and proposed aggregates is the lack of timely,
reliable data verified by Federal Reserve
reporting p r o c e d u r e s . A n interesting
perspective, h o w e v e r , is available f r o m
an industry s o u r c e that reports m o n e y
market f u n d assets totaling $26 billion at
the e n d of June 1979. Just a year earlier,
they w e r e $6 3/4 billion. 3
Repurchase Agreements. R e p u r c h a s e
agreements (RPs) w e r e originally created
in the 1930s but have g r o w n very rapidly
in the past five years. A r e p u r c h a s e agreement is typically an overnight loan of
immediately available funds secured by
U. S. Treasury securities. O n the f o l l o w i n g
day, the funds are r e t u r n e d to the lender
with interest. Large nonfinancial corporations have learned to m i n i m i z e their
end-of-day d e m a n d deposit holdings by
arranging RPs with their c o m m e r c i a l b a n k s .
RPs are a c o n v e n i e n t and low cost cash
m a n a g e m e n t tool.
W h i l e an RP, itself, is not a m e d i u m of
e x c h a n g e , it is a highly liquid alternative t o
d e m a n d deposits. Yet, like m o n e y market
funds, RPs will not be i n c l u d e d in the
Board's r e d e f i n e d monetary aggregates.
3
D o n o g h u e ' s Money Fund Report, Holliston, M a s s a c h u s e t t s , v a r i o u s i s s u e s .
84
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A g a i n , like m o n e y market f u n d s , this is
partly because of data limitations.
W h a t R P data that are available s h o w
a b u r g e o n i n g growth. Estimates of
c o m m e r c i a l bank RPs with the n o n b a n k
p u b l i c are available back to late 1969. 4 At
that time, outstanding RPs averaged about
$4 1/2 billion. By the t i m e of .the r e c o r d high m o n e y market yields in mid-1974, the
a m o u n t outstanding had g r o w n to nearly
$17 1/2 billion. At the e n d of M a y 1979,
RPs outstanding at all c o m m e r c i a l banks
totaled over $47 billion.
In recognition of this g r o w i n g use of
RPs, the Board staff intends to publish a
separate RP series as a c o m p a n i o n to the
r e d e f i n e d monetary aggregates.
Money Market Certificates. M o n e y market
certificates ( M M C s ) w e r e a u t h o r i z e d
on June 1, 1978, for all depository institutions. (Credit u n i o n s r e c e i v e d authority
slightly later.) T h e s e are six-month certificates of deposit issued in m i n i m u m
d e n o m i n a t i o n s of $10,000, with an initial
yield tied to the w e e k l y auction rate o n
six-month Treasury bills.
Like other time deposits, t h e r e is a
substantial interest penalty for early withdrawal. This feature gives M M C s a lower
d e g r e e of liquidity than passbook savings
deposits. But the relatively short six-month
maturity makes t h e m m o r e liquid than
other time deposits. In the Board staff's
proposed monetary aggregates, m o n e y
market certificates will b e i n c l u d e d in M 3 ,
w h i c h is d e f i n e d as the n e w M 2 plus all
time deposits at all depository institutions.
M M C s have b e e n a big hit with the general p u b l i c because of t h e high and rising
yields they've o f f e r e d since their introduction. W h e n first o f f e r e d in June 1978,
M M C s y i e l d e d 7 3/4 percent at thrifts
(one-fourth point higher than banks), inc l u d i n g daily c o m p o u n d i n g of interest. In
late July, these six-month certificates
yielded about 9 1/4 p e r c e n t , with daily
c o m p o u n d i n g no longer a l l o w e d .
By the e n d of M a y 1979, M M C s stood
at a r o u n d $158 billion at all depository
institutions, up f r o m z e r o just one year
earlier. T h e y a c c o u n t for 13 1/2 percent
" E s t i m a t e s of all c o m m e r c i a l b a n k R P s with t h e n o n b a n k p u b l i c a r e a v a i l a b l e
f r o m the B a n k i n g S e c t i o n , D i v i s i o n of R e s e a r c h a n d S t a t i s t i c s , B o a r d
of G o v e r n o r s of t h e F e d e r a l R e s e r v e S y s t e m .
J U L Y / A U G U S T 1979, E C O N O M I C R E V I E W
July 1979
a n d 17 1/4 percent of savings and small
time deposits at c o m m e r c i a l banks a n d
thrifts, respectively.
New Accounts for Governments and
Businesses. T w o regulatory changes in
the mid-1970s made c o m m e r c i a l bank
savings accounts available to state and
local g o v e r n m e n t s and partnerships and
corporations.
Business savings accounts are limited to
$150,000 per account. Because these savings
accounts are linked by t e l e p h o n i c transfer to d e m a n d deposit accounts, they are
highly liquid assets, estimated to have
heavier activity than personal savings accounts. Like all other savings accounts,
they are i n c l u d e d in the p r o p o s e d
M 2 aggregate.
At first, business and g o v e r n m e n t savings
accounts grew rapidly as those groups
took advantage of a n e w and attractive
alternative to d e m a n d deposits. R e c e n t l y ,
h o w e v e r , these accounts nave stabilized at
a r o u n d $4 1/2 billion for state and local
g o v e r n m e n t s a n d $10 1/4 billion for
Businesses.
S U M M A R Y AND C O N C L U S I O N S . Recent
financial innovations a n d regulatory
changes have r e d u c e d the accuracy of
the c u r r e n t M-i as a m e a s u r e of the public's transactions balances. At the same
time, other d e v e l o p m e n t s have e n h a n c e d
savings deposit liquidity w h i l e fostering
growth of less liquid time deposits.
In recognition of these events, the
Board staff has p r o p o s e d n e w definitions
of M-,, M 2 , and M 3 , restricted to liabilities
of depository institutions. T h e n e w definitions are s u m m a r i z e d in Table 6.
Proposed M i will presumably i n c l u d e
all transactions balances, except to the
extent that the p u b l i c uses its m o n e y
market funds as a means of p a y m e n t . To
those w h o v i e w RPs as quasi-transactions
balances, a separate series will be available
to use at their discretion.
T h e p r o p o s e d M 2 will incorporate the
r e d e f i n e d M i plus all savings deposits regardless of their institutional location.
T h e r e will be no m i x i n g of time and savings
F E D E R A L RESERVE BANK O F A T L A N T A
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Federal Reserve Bank of St. Louis
TABLE 6
NEWLY
MONETARY
PROPOSED
AGGREGATES
Proposed M1
Current M1
+ NOW
Accounts
+ Share Drafts
+ Demand Deposits at Thrifts
+ ATS Accounts
— Demand Deposits of Certain Foreigners
Proposed M2
Proposed M1
+ Savings Deposits at All Depository
Institutions
Proposed
M}
Proposed M2
+ Time Deposits (small and large) at All
Depository
Institutions
deposits, w h i c h have recently b e c o m e dissimilar in liquidity. M o n e y market funds
will not be i n c l u d e d in any aggregate,
although they appear to be as liquid as
savings deposits.
Finally, the p r o p o s e d M 3 will i n c l u d e
the n e w M 2 plus time deposits (both large
and small) at all depository institutions.
It w o u l d be a mistake to add m o n e y market
funds to the n e w M 3 , since large C D s
a c c o u n t for a large portion of the funds'
portfolios a n d w o u l d i n v o l v e " d o u b l e
c o u n t i n g . " To avoid this p r o b l e m , an M 2 +
c o u l d be d e f i n e d as p r o p o s e d M 2 plus all
small-denomination
time deposits plus
m o n e y market mutual funds. 5
T h e n e w monetary aggregates should
give the F O M C a clearer lens t h r o u g h
w h i c h to view the behavior of " m o n e y "
in d e t e r m i n i n g monetary policy strategies.«
S e p a r a t i n g small- and large-denomination time deposits would be advisable
on its o w n m e r i t s , s i n c e they b e h a v e q u i t e differently d u r i n g p e r i o d s of h i g h
a n d rising m a r k e t interest r a t e s . T h i s o c c u r s b e c a u s e large C D s a r e
not s u b j e c t to interest r a t e c e i l i n g s . S e e T i m o t h y C o o k , " T h e I m p a c t of L a r g e
T i m e D e p o s i t s o n t h e G r o w t h R a t e of M , , " E c o n o m i c Review, F e d e r a l R e s e r v e
B a n k of R i c h m o n d , M a r c h / A p r i l 1978.
85