SHOULD BOND FUNDS BE ADDED TO M2

In the early 1990s, M2 growth has been weaker than estimated while bond mutual funds have grown rapidly, This study assesses whether adding bond funds to M2 would yield a monetary aggregate that is more explainable using a standard error correction model of money with and without modifications for bond interest rate and thrift resolution effects. Results indicate that it is important to net out institutional and IRA/Keogh assets from bond funds (as is done for M2) and that adding such a bond fund series to M2 results in an aggregate that is somewhat more explainable than M2.