Monetary aggregates as indicators of economic activity in Canada: empirical evidence

Empirical evidence linking monetary aggregates to variables such as inflati on and economic growth has weakened over the past two decades. In this stud y we re-examine these relationships by creating composite monetary aggregat es that switch among existing monetary aggregates, using quarterly data ove r the sample 1971-99. Overall, composite monetary aggregates appear to be u seful in explaining or forecasting short-run movements in GDP growth and in flation. Also, the most successful composite monetary aggregates produce sw itch dates that overlap with the introduction of financial innovations. The se subsequently prompted the Bank of Canada to revise or introduce new mone tary aggregates.