Working Paper No. 20
By F J Breedon and P G Fisher
This paper addresses some practical issues in understanding the determinants of M0 and its informational content. The first three issues relate to the estimation of a demand for M0 equation: explaining the trend in velocity, the choice of scale variable and the partial response of M0 to changes in interest rates. These issues are explored using annual, quarterly and monthly data. The final topic is the use of M0 in predicting inflation. Our simple tests support the growing literature which suggests that M0 is a relatively good leading indicator of inflation.
M0: Causes and Consequences