Sweep-Adjusted Monetary Aggregates for the United States

Published Papers

Interest on reserves, unregulated interest on demand deposits, and optimal sweeping
(Donald H. Dutkowsky and David D. VanHoose)
Journal of Macroeconomics, Available online 16 August 2013

Abstract: This paper examines the joint determination of the interest rate on demand deposits and swept funds given interest on reserves and the elimination of Regulation Q. Our model works within monopolistically competitive loan and deposit markets and incorporates sweeping from deposit accounts to reserve-exempt accounts. Under unregulated deposit rates, we derive solutions for the market equilibrium values of the deposit rate and the share of deposits allocated to swept funds. Sweeping responds positively to the interbank loan rate and marginal resource costs for unswept funds, and negatively to the interest rate on reserves, reserve ratio, and the marginal resource cost of sweeping. The deposit rate responds positively to the interbank loan rate, interest rate on reserves, and reserve ratio, but negatively to marginal resource costs of sweeping and holding unswept funds. We also investigate deposit market equilibrium under a zero deposit rate restriction with sweeping. Here, the share of swept funds and the portion of the interbank rate passed on to swept balances adjust to attain market equilibrium. Sweeping enables banks to replicate outcomes from unhindered deposit rate competition. The equilibrium return that banks pay depositors and the share of swept funds are the same as with unrestricted deposit rates.

Interest on Bank Reserves and Optimal Sweeping
(Donald H. Dutkowsky and David D. VanHoose)
Journal of Banking and Finance, 2011, vol. 35, issue 9, pages 2491-2497

Abstract: A key rationale offered by the Federal Reserve for the payment of interest on reserves was to remove the incentive for banks to operate sweep accounts. Sweeping shifts funds from transactions deposits subject to reserve requirements to non-reservable deposits. This paper extends a conventional banking model to analyze sweeping behavior. Sweeping responds positively to increases in bank loan rates and reserve ratios and negatively to increases in the interest rate on reserves or exogenous increases in bank equity. Sweeping generates greater responsiveness in lending to changes in loan rates or the interest rate on reserves and lower responsiveness to changes in reserve ratios or equity than in its absence. Empirical analysis of an explicit condition that we derive suggests that, with an unchanged reserve requirement, the Fed could eliminate sweeping by setting the interest rate on reserves to no less than approximately four percentage points below the market loan rate.

Retail Sweep Programs and Monetary Asset Substitution
(Barry E. Jones, Adrian R. Fleissig, Thomas Elger, and Donald H. Dutkowsky)
Economics Letters, 2008, vol. 99, issue 1, pages 159-163

Abstract: This paper examines how retail sweep programs affect monetary asset substitution. Estimates from the Fourier flexible form reveal that sweeping generates systematic and sometimes large distortions in estimated bank depositor substitution elasticities.

Redefining the Monetary Aggregates: A Clean Sweep
(Barry Z. Cynamon, Donald H. Dutkowsky, and Barry E. Jones)
Eastern Economic Journal, 2006, vol. 32, issue 4, pages 661-672

Abstract: This paper focuses on the role of sweep programs in properly measuring money. We propose new monetary aggregates that adjust the conventional measures to account for the medium of exchange capability of funds in sweep programs. Using data on swept funds in retail and commercial demand deposit (DD) sweep programs, we provide time series of monthly data on the sweep-adjusted money measures. By the twenty-first century, DD sweeps have led to distortion in reported MZM of approximately 3%, 5% for M2, and 6% for M2M. Underreporting of M1 due to retail and DD sweep programs is almost 70%.

Forecasting with Monetary Aggregates: Recent Evidence for the United States
(Thomas Elger, Barry E. Jones, and Birger Nilsson)
Journal of Economics and Business, 2006, vol. 58, issue 5-6, pages 428-446

Abstract: We investigate the out-of-sample forecasting performance of various monetary aggregates in four-variate models of real output growth, inflation, changes in an interest rate, and nominal money growth from 1992 to 2004 using vector autoregressive (VAR) and regime-switching (RS) VAR models.We consider both Divisia and simple sum monetary aggregates for M1, M2M, M2, and M3 as well as sweep-adjusted M1 measures. We find little evidence that either aggregation method or level of aggregation has a big impact on the forecasting performance of our model with respect to inflation and real output growth. Our results indicate that VAR models with monetary aggregates appear to produce at best marginal improvements in RMSE over VAR models that omit money growth altogether. We also find that RS-VAR models usually provide better one quarter ahead forecasts than comparable VAR models, but often did worse when forecasting inflation four quarters ahead.

U.S. Narrow Money for the Twenty-First Century
(Donald H. Dutkowsky, Barry Z. Cynamon, and Barry E. Jones)
Economic Inquiry, 2006, vol. 44, issue 1, pages 142-152

Abstract: This study focuses on sweep programs in establishing conceptually appropriate and reliable measures of narrow money.We propose the aggregates M1RS = M1 + holdings of funds swept in retail sweep programs, and M1S = M1RS + holdings of funds swept in commercial demand deposit sweep programs. Based on quarterly observations from 1959:1–2002:4, cointegration tests indicate the existence of long-run relationships between the velocity of M1S and the corresponding opportunity cost of holding money, using either short-term or long-term interest rates. Tests find weaker evidence for M1RS and little support for MZM.

Sweep Programs and Optimal Monetary Aggregation
(Barry E. Jones, Donald H. Dutkowsky, and Thomas Elger)
Journal of Banking and Finance, 2005, vol. 29, issue 2, pages 483-508

Abstract: This paper examines the admissibility of monetary aggregate groupings for the US over 1993–2001, based upon weak separability. We investigate the impact of retail and commercial demand deposit sweep programs on the separability of monetary asset groupings. Weak separability is tested using the Swofford–Whitney and Fleissig–Whitney tests. We use Varian’s measurement error adjustment procedure to eliminate violations of the Generalized Axiom of Revealed Preference (GARP). When funds from both retail and commercial demand deposit sweep programs are placed within checkable deposits, all groupings, narrow and broad, pass GARP and weak separability. For groupings based on conventional money measures, tests tend to favor broad aggregates.

Sweep Programs: The Fall of M1 and Rebirth of the Medium of Exchange
(Donald H. Dutkowsky and Barry Z. Cynamon)
Journal of Money, Credit, and Banking, 2003, vol. 35, issue 2, pages 263-279

Abstract: This paper investigates the effect of sweep programs on M1 using dynamic simulations of money demand over 1994–2000. The postsample period constitutes when sweep programs have been in effect. All models generate predictions systematically above reported M1. Using data on newly initiated programs, test findings indicate that sweeps account for the overprediction within the conventional money demand model with a long-term interest rate. We construct a medium of exchange measure, M1S, equal to M1 plus estimated holdings of sweep balances. M1S velocity compares favorably with that of broader aggregates. Evidence indicates cointegration within M1S money demand.