Macro Forecasts by Use of a Nonparametric Monetary Aggregate

Since neither the conventional simple sum aggregates which do not consider the user cost of the interest rate elasticity, nor the theoretically preferred approach, the Divisia index, which considers the optimizing behavior of economic agents, performs as well as expected in econometric studies, estimation, and forecasting. I propose an alternative aggregate, HM, by applying a nonparametric estimation. This paper shows HM performs bettern than the other two monetary aggregates in forecasting major economic variables such as real GDP growth rate, inflation, and changes in interest rate.