Working Paper No. 35
By Mark S Astley and Andrew G Haldane
We assess the leading indicator properties of various of the money and credit aggregates over real activity and inflation, using Granger causality tests and impulse response functions. The approach is explicitly disaggregated, looking at sectoral measures of money and credit and various disaggregations of activity - in line with the results of earlier Bank research. We find strong and significant effects from narrow money through to nominal GDP and, in particular, prices. Broader measures of money / credit - M4, M4 lending and Divisia - do much less well at an aggregate level. But sectoral disaggregation helps matters: for example, corporate M4 and Divisia appear to have a reliable mapping with investment and production and some measures of prices. However, none of the monetary aggregates offer sufficiently robust early warning signals to justify intermediate target status. Rather the message is that, when used alongside other information variables such as the Bank's inflation projection, some of the monetary aggregates offer useful corraborative information about incipient activity and price developments.
Money as an Indicator