Consequences of Money Stock Mismeasurement: Evidence from Three Countries

Abstract

Central banks continue to publish simple-sum measures of the money stock and draw policy inferences from their behaviour even though it has been demonstrated conclusively that these data violate basic principles of economic and index number theory. As such, any in-sample results based on simple sum data must be spurious. Furthermore, the absence of any statistical properties in these data preclude their use in making out-of-sample forecasts.¹ Nonetheless, some research, which acknowledges the conceptual error of simple-sum measures, has defended their use on practical grounds.² Generally speaking, the reasoning has been that index number theory raises some interesting and potentially important issues for the construction and use of measures of the money stock, but that measurement has turned out to be unimportant empirically in real-world applications.