bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

44 MONETARY ECONOMICS
ized by the M3/PSL2 distinction) became unsustainable and so M4 developed
alongside M3 as a rival broad money aggregate. The same Act
enabled building societies to convert to plc status, in other words to become
banks. When the Abbey National Building Society did so in June 1989, this
produced a sharp upward break in all those series (excluding NIBM1),
which contained only bank deposits. From July 1989, therefore, M3 was
discontinued and building society deposits became officially, as many holders
had regarded them for years unofficially, ‘money’. NIBM1 survived
until 1991 because it was unaffected, the Abbey National Building Society
having virtually no non-interest-bearing deposits.
1991 also saw major changes in the recording and classification of liquid
(non-money) assets. Part of the revision involved discontinuing the
publication of M4c and transferring the foreign currency component to M5.
But the assets in M5 itself were dramatically supplemented to include,
amongst other items, UK-owned off-shore sterling deposits; the overseas
sector’s holdings of sterling deposits (in the UK and offshore); UK-owned
commercial paper, short-dated gilts and, reminiscent of a suggestion first
made over sixty years ago by J M Keynes, unused sterling credit facilities
such as agreed (but unused) overdraft agreements.
The traditional approach to defining money, as Table 2.1 shows, involves
identifying an appropriate subset of financial assets. Measuring the quantity
of money then involves the simple aggregation of all those assets in the
subset at their nominal value. While this may be an obvious (and straightforward)
approach it suffers from both a theoretical and an empirical weakness.
At the theoretical level, simple aggregation implies that we are dealing
with homogeneous assets. We seem to be saying, for example, that from
a monetary point of view, £1bn of CDs is the same as £1bn of notes and
coin. The mere fact that CDs pay interest while notes and coin do not, however,
indicates some degree of differentiation since otherwise no one would
hold notes and coin. At the empirical level, as we saw in Section 1.3, economists
are usually interested in the closeness of the relationship between a
monetary aggregate and income. This is likely to increase with the extent
to which the aggregate is dominated by assets used for transactions. As we
also saw in 1.3, however, it is difficult to know exactly where to draw the
line between whole classes of assets for this purpose. Notes and coin and
sight deposits are all perfectly liquid and are obvious transactions media but
we know that time deposits can be switched to sight deposits quickly and
cheaply and that other, apparently less liquid, assets have sufficient liquidity
that they could still be relevant to transactions, albeit to a lesser degree.
The Divisia approach involves weighting each of the component assets