RDP 9606: The Information Content of Financial Aggregates in Australia 3. Data

The data sample consists of quarterly data on four financial aggregates (specifically, currency, M3, broad money, and credit of all financial intermediaries).^[7] The sample period for estimation begins at 1976:Q4, and ends in 1995:Q3. Some of the aggregates have much earlier start dates but the sample is restricted so that all measures are evaluated on the same basis.

The other measures in the study are real GDP (output), underlying CPI (price level), the 90-day bank bill rate (interest rate), and the trade-weighted index of the exchange rate. We transform all measures by taking logarithms, except for the interest rate. The short sample of the data limits the size of the VAR that can be studied in an unrestricted form. As discussed earlier, the addition of the interest rate and the exchange rate provide a more comprehensive system in which to analyse the information content of financial aggregates.^[8] The data are presented in graphical form for first differences in Appendix A.

For descriptive purposes, the data in quarterly growth rates (first differences) are quite noisy, and it is useful to transform them into four-quarter-ended growth rates to emphasise the longer term trends.^[9] Figures 1 and 2 compare the movements in the growth rate of the financial aggregates with the movements of inflation and real output growth. For the majority of the sample, the movements in the four-quarter-ended growth in the financial aggregates do not appear to be tracking those of the CPI. In the period around the 1990–91 recession, however, the growth in each of the aggregates as well as the inflation rate trended sharply downwards. The overall correlations between the aggregates and the CPI may be strongly influenced by this period, which may not be representative of the long-term relationship between the variables.

All the aggregates appear to display a noticeable correlation with real output growth, but there does not appear to be an obvious leading relationship between any of the aggregates and real GDP. This examination of the figures provides a reference point for interpreting the relationships among the data that are uncovered in the statistical work below.

Footnotes

See the Data Appendix for a description of the series. [7]

The introduction of additional variables into the VAR system could be important if an additional variable alters the observed predictive power of money. [8]

The trends most noticeable in this transformation were also evident in the quarterly growth rate transformation used in the estimations. [9]