The Optimal Level of Monetary Aggregation

IN THIS PAPER, I have three objectives: (1) to describe the aggregation theoretic procedure for selecting the optimal monetary aggregateS (2) to survey the available empirical evidence for information on the optimal aggregateS and (3) to describe the procedures that should be followed to complete a redefinition of the monetary aggregates. Although all of the Federal Reserve Board's current official aggregates are rejected as targets, some newer aggregates are found to be substantially preferable to the official aggregates. The board's staff recently completed the official redefinition of its monetary aggregates in a manner largely unrelated to aggregation and index number theory. My own research in recent years has sought to remedy that shortcoming. Except for monetary aggregates, most of the data provided by governmental agencies are constructed in accordance with aggregation and index number theory. Since aggregation theory can be applied to monetary aggregation, 1 I constructed new monetary aggregates that are consistent with the economic theory.2 Recently the empiri-