I have uploaded the paper that I referred to in the previous post that re-examines widely-cited empirical results using Divisia monetary aggregates. Here is the abstract:
The emerging consensus in monetary policy and business cycle analysis is that money aggregates are not useful as an intermediate target for monetary policy or as an information variable. The uselessness of money as an intermediate target is driven by empirical research that suggests that money demand is unstable. In addition, the informational quality of money has been called into question by empirical research that fails to identify a relationship between money growth and inflation, nominal income growth, and the output gap. Nevertheless, this research is potentially flawed by the use of simple sum money aggregates, which are not consistent with economic, aggregation, or index number theory. This paper therefore re-examines previous empirical evidence on money demand and the role of money as an information variable using monetary services indexes as monetary aggregates. These aggregates have the advantage of being derived from microtheoretic foundations as well as being consistent with aggregation and index number theory. The results of the re-evaluation suggest that previous empirical work might be driven by mismeasurement.
The Everyday Economist 
As long as we’re trying to measure the amount of money that exists, let’s also measure the amount of IBM stock that exists. I propose we count the following:
1) Base stock, consisting of paper shares issued by IBM. But wait: what if the shares only exist as bookkeeping entries? Or what if they are held in a broker’s vault, rather than by the public?
2) M1 stock, which consists of the base plus hypothecated shares of stock, which are shares whose delivery has been promised by a broker but which have not yet been delivered. These get created all the time when people take short positions. But what if the shares were promised by someone other than a broker? or even by foreigners?
3) M2 stock. Let’s define this as M1 + hypothecated shares that can’t be redeemed on demand, but are subject, like a savings account, to delayed payment at the issuer’s discretion.
4) M3 stock. This will be M2 stock plus warrants, call options, and anything else we haven’t thought of.
Eventually, it might occur to someone that the price of IBM stock depends on IBM’s assets, and on how many shares IBM itself issued, regardless of whether they exist as paper or bookkeeping entries, and regardless of who holds them. Then someone might notice that the amount of hypothecated shares issued should be uncorrelated with the value of IBM.
Will anyone ever notice that the principles determining the value of the dollar are the same as those determining the value of IBM stock?
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