Money and Credit Factors

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The authors introduce new measures of important underlying macroeconomic phenomena that affect the financial side of the economy. These measures are calculated using the time-series factor analysis (TSFA) methodology introduced in Gilbert and Meijer (2005). The measures appear to be both more interesting and more robust to the effects of financial innovations than traditional aggregates. The general ideas set out in Gilbert and Pichette (2003) are pursued, but the improved estimation methods of TSFA are used. Furthermore, four credit aggregates are added to the components of the monetary aggregates, resulting in the possibility of extracting more common factors.

This extended data set gives a fairly complete picture of the asset and liability sides of the economy. As might be expected, credit data are largely explained by the same factor that explains investment (since investment provides the capital for credit). Contrary to traditional thinking about monetary aggregates, however, personal chequing deposits do not behave like currency, and thus require a separate factor to explain them. The factor explaining currency reflects current spending, traditionally considered transactions money. One interpretation of the factor explaining personal chequing deposits is that it represents potential spending. This may reflect different horizon planning by the same consumers, or it may reflect different consumers with varying spending habits or financial constraints. These conjectures remain subjects for future research.