“The Right Measure of the Money Supply” by Professor Peter Ireland

In his article titled “The Right Measure of Money Supply,” Professor Peter Ireland of Boston College explores the usefulness of monetary aggregates in signaling monetary policy in real time. In his analysis he uses four series: the Federal Reserve’s M1 and M2 and CFS’ Divisia M1 and M2.

Professor Ireland finds the Divisia measures particularly helpful: “Rather than simply adding up the values of funds held in various types of bank accounts, as the Federal Reserve’s measures do, the Divisia aggregates draw on methods that explicitly recognize, for instance, that a dollar held in a NOW account is more liquid—and can therefore be said to provide a larger flow of “monetary services”—than the same dollar held in a three-month CD. Quite helpfully, too, the CFS aggregates also adjust the Federal Reserve’s official measures to remove the distortionary statistical effects of computerized problems that most banks now use to invisibly “sweep” funds on deposit in customers’ checking accounts into savings accounts for the purpose of minimizing statutory reserves requirements.”

Professor Ireland has done extensive work with Divisia monetary aggregates. “[My] colleague Michael Belongia and I have shown that when Divisia measures of the money supply are used in place of the Federal Reserve’s official simple-sum aggregates, strong statistical links between movements in Divisia measures of money and subsequent changes in output and prices can be found in data spanning the Great Inflation of the 1970s, the Great Moderation of the 1980s and 1990s, and the Great Recession of 2008.”

He concludes with warm comments for CFS Director and originator of the Divisia aggregates, William A. Barnett. “It is clear that economists owe a debt of gratitude to Barnett, and to his colleagues Richard Anderson and Barry Jones, for their careful work in adjusting the official measures of the money supply. Less clear is why the Federal Reserve cannot or will not simply make those adjustments to the official statistics themselves.”


In addition to being a professor of economics at Boston College, Professor Ireland is a research associate at the National Bureau of Economic Research and a member of the Shadow Open Market Committee.

To read the full article, click here.