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St. Louis Adjusted Monetary Base Series

November 18, 1996

The new adjusted monetary base, adjusted total reserves and adjusted nonborrowed reserves time series are chain indexes created in segments. Major changes in the structure of reserve requirements demarcate the beginning and end of segments, and are the reason why these are calculated as chain indexes. The reserve adjustment magnitude, or RAM, "adjusts" the monetary base for changes in the demand for base money due to changes in statutory reserve requirement ratios within a given structure of reserve requirements (where the structure defines the types of deposits that are reservable, perhaps by class or type of depository institution), conditional on an assumed model of depository institutions' demand for base money; see Burger and Rasche (1977) and Anderson and Rasche (1996a). When there is a major change in the structure of reserve requirements - such as the extension of reserve requirements to nonmember banks and thrifts under the Monetary Control Act - carrying the same RAM across the break is inappropriate. Rather, the old RAM should end and a new RAM start. During periods both before and after the break, for example, the AMB equals the sum of the monetary source base and a RAM - but not the same RAM before and after the break.

Adjusted Monetary Base

The adjusted monetary base equals the sum of the monetary source base and an appropriate RAM adjustment. The new AMB is constructed in four segments: January 1936 - December 1972, December 1972 - January 1975, January 1975 - October 1980, and October 1980 to date. The overall AMB for 1936 - date is created by splicing the individual segments at the overlapping months: December 1972, January 1975, and October 1980.

The new adjusted monetary base includes four RAMs: RAM1 (1936-72), RAM2 (1972-75), RAM3 (1975-80) and RAM4 (1980-date). Each RAM has a different base period, corresponding to a particular structure of reserve requirements. The systems of statutory reserve requirements that correspond to RAM1, RAM2 and RAM3 are discussed in Tatom (1980). RAM4 is based on the set of requirements in effect during the reserve maintenance period ending January 7, 1991; see Anderson and Rasche (1996a).

Adjacent pairs of RAM are measurable both before and after each splice date - in December 1972, January 1975, and October 1980 -- permitting chaining the overall AMB index. For the most recent subinterval, from November 1980 - date, the AMB equals the sum of the monetary base and RAM4 (1980-96). For the period January 1975 - October 1980, the AMB equals the sum of the monetary base and RAM3 (1975-80), multiplied by the ratio of the adjusted monetary base in October 1980 including RAM4 to the adjusted monetary base in October 1980 including RAM3. For example, the AMB for July 1980 is:

AMB (July 1980)

= [Monetary Source Base (July 1980) + RAM3 (July 1980)]

* { [Monetary Source Base (October 1980) + RAM4 (October 1980)]

\ [Monetary Source Base (October 1980) + RAM3 (October 1980)] }

The first term is the AMB for July 1980 as it would be calculated in July 1980; the second term "splices" values of the AMB for periods before October 1980 to later values. For 1972-75, the AMB is multiplied by two ratios. The AMB for July 1974, for example, equals:

AMB (July 1974)

= [Monetary Source Base (July 1974) + RAM2 (July 1974)]

* { [Monetary Source Base (January 1975) + RAM3 (January 1975)]

\ [Monetary Source Base (January 1975) + RAM2 (January 1975)] }

* { [Monetary Base (October 1980) + RAM4 (October 1980)]

\ [Monetary Base (October 1980) + RAM3 (October 1980)] }

The first ratio chains the 1972-75 data to the 1975-80 data, and the second chains the 1975-80 data to the 1980-96 data.

RAM Adjustment

For dates through October 1980, RAM1 (1936-72), RAM2 (1972-75), and RAM3 (1975-80) are due to Tatom (1980); see his Appendix 1, Table 1. We use only the RAM adjustment, not the published adjusted monetary base or adjusted reserves data shown in Tatom (1980); a different monetary source base, discussed in the next section, is used to construct the new adjusted monetary base. Tatom's three RAM adjustments are based, respectively, on the structures of reserve requirements in effect during 1935, 1972 and 1975. The new RAM4 (1980-96) for dates beginning November 1980 is calculated by the method described in Anderson and Rasche (1996a) from deposit and reserves data submitted weekly since 1980 to the Federal Reserve by about 12,000 depository institutions. For each week (through January 1984), or biweekly reserve maintenance period (beginning February 1984), the calculation proceeds in three steps:

1. First, depository institutions are separated into two groups, based on the statistical analysis presented by Anderson and Rasche (1996b). The first group includes all economically-bound (E-Bound) institutions, or in other words, all institutions subject to Federal Reserve reserve requirements whose (i) net transactions deposits exceed the low reserve tranche, and (ii) required reserves exceed the amount of vault cash that they may use to satisfy required reserves. Other depositories are placed in the second group. In addition, for reserve maintenance periods beginning January 8, 1991, depository institutions with net transactions deposits less than about $135 million are moved from the first group to the second (this cutoff is indexed to the annual growth in aggregate net transactions deposits, as discussed above) .
2. Next, for each institution in the first group, an individual-institution RAM is calculated by subtracting the institution's required reserves in that week (or reserve maintenance period) from an estimate of what the institution's required reserves would have been if the reserve requirements that prevailed during the reserve maintenance period ending January 7, 1991, had been in effect. This is the Burger-Rasche (1977) adjustment applied to individual institutions, using the January 1991 base period.
3. Finally, the aggregate reserve adjustment magnitude is calculated for each week (or reserve maintenance period) by summing the individual reserve adjustment magnitudes across all depository institutions in the first group. Nothing is included in RAM for depositories in the second group.

Monetary (Source) Base

For January 1936 - December 1958, the new AMB includes the currently-published (on FRED®) St. Louis monetary source base. Beginning January 1959, the new AMB includes a revised St. Louis monetary source base equal to the sum of three variables: currency in circulation outside Federal Reserve Banks and the Treasury; deposits of domestic depository institutions at Federal Reserve Banks; and float-pricing related as-of adjustments. This measure of the monetary source base corresponds to line 8 of Table 1 in Anderson and Rasche (1996a, 1996b). All data are obtained from the Division of Monetary Affairs at the Federal Reserve Board of Governors, and are published on the Board's weekly H.4.1 statistical release. The second item, Federal Reserve deposits, equals the sum of two items published on the H.4.1: reserve balances and required clearing balance contracts, the latter shown in a footnote on the first page of the release. The third item, float-pricing related adjustments, is a small item mandated by the Monetary Control Act's requirement that the Federal Reserve recover from depository institutions the value of float generated in check processing; it is included in "service-related adjustments" in a footnote on the first page of the H.4.1 release. (Note that the aggregate amount of reserve balances shown on the H.4.1 is defined by Board staff as equal to: the aggregate amount of depository institutions' Federal Reserve deposits, minus the aggregate amount of required clearing balance contracts and service-related adjustments, minus other small unpublished accounting adjustments.)

Seasonal Adjustment

The new monthly AMB is seasonally adjusted with a sliding window X11-ARIMA procedure. First, an ARIMA model is used to forecast the not seasonally adjusted AMB two years beyond the end of last full year of data (at the time of this writing, 1995), through December 1997. Then, beginning in 1950 (fluctuations in earlier data seem too unstable to reasonably estimate a seasonal component), the standard Bureau of the Census X11 filter is applied sequentially to a window of eight years of data, the final window spanning January 1990 through December 1997. This method permits more time variation in the estimated seasonal factors than would be obtained by applying X11 directly to longer spans of data. Such flexibility seems desirable for the monetary base because a time-series plot of its monthly growth rates suggests a sharp decrease in its seasonal amplitude after 1990, perhaps due to heavy exports of currency.

Seasonal adjustment factors for biweekly (reserve maintenance period) data are obtained by a ratio-of-moving-average procedure. In this method, a set of initial estimates of biweekly seasonally-adjusted levels of the adjusted base is obtained via polynomial interpolation between observations on seasonally-adjusted monthly levels. An initial set of seasonal adjustment factors are obtained by dividing actual not-seasonally-adjusted biweekly levels by these initial estimated seasonally-adjusted levels. This process is iterated to convergence, subject to the restriction that the final seasonally-adjusted biweekly levels average to the given seasonally-adjusted monthly levels.

Adjusted Total Reserves

Issues in Defining "Total Reserves" of Depository Institutions

There are two major, alternative economic measurements of "total reserves."

A. A Definition Motivated by Statutory Reserve Requirements

This narrow definition is "eligible assets of depository institutions subject to Federal Reserve reserve requirements." "Eligible" here refers to assets that may be used to satisfy statutory reserve requirements against deposits, not be confused with the concept of assets eligible to be used as collateral for discount window loans.

This definition of total reserves focuses on satisfying statutory reserve requirements and a depository's business needs for vault cash and Federal Reserve deposits are not explicitly considered. Rather, it is assumed that the amounts of vault cash and reserve balances held to satisfy statutory requirements are sufficient to satisfy the depository's payment needs.

Under this definition, total reserves is measures as:

1. for dates prior to November 1, 1959: Total Reserves = Federal Reserve deposits held by member commercial banks. Vault cash was not an eligible asset prior to December 1959; required reserves were satisfied with Federal Reserve Bank deposits.
2. December 1, 1959 - November 11, 1980: Total Reserves = Federal Reserve deposits held by member banks plus lagged vault cash of member banks. Only vault cash held by a bank two weeks prior to the current week was eligible to satisfy reserve requirements. Because the required reserves of virtually all member banks exceeded their (lagged) vault cash, essentially all lagged vault cash is included in member bank reserves. The eligibility of vault cash was phased-in from December 1, 1959 - November 23, 1960; beginning November 24, 1960, all lagged vault cash was an eligible asset. Vault cash held by nonmember banks and thrifts is not included.
3. November 1980 - date: Total Reserves = current period vault cash of depository institutions in which lagged vault cash exceeds required reserves, plus lagged vault cash for depository institutions in which required reserves exceeds vault cash, plus the reserve balances of all depository institutions. Reserve balances is defined to equal aggregate Federal Reserve deposits minus aggregate required clearing balance contracts. The amount of required clearing balance contracts is excluded because, it is argued, depository institutions regard the Federal Reserve deposits necessary to fulfill those contracts as unavailable to support the issue of additional deposits or loans.

These measures of total reserves are constructed by staff of the Division of Monetary Affairs at the Federal Reserve Board and published on the Board's weekly H.3 statistical release. Details of their construction and adjustment for changes in reserve requirements are available from the Division of Monetary Affairs. Published sources for these data include:

B. A Definition Motivated by Depository Institutions as Financial Intermediaries and Sellers of Payments Services

One implication of the results reported by Anderson and Rasche is that broad measures of reserves may be important to modeling the role of depository institutions in the economy. In addition to satisfying statutory reserve requirements, depository institutions must hold sufficient vault cash and Federal Reserve deposits to convert retail customer deposits into currency and to make interbank payments, on request. The measure of total reserves published by the Federal Reserve Bank of St. Louis equals the monetary source base minus currency held by the nonbank public. Measured in this way, total reserves includes all base money held by depository institutions, including the vault cash held by nonmember banks and thrifts prior to the Monetary Control Act and, more recently, the Federal Reserve deposits held by depositories to satisfy required clearing balance contracts.

Although reserve requirements have varied significantly since the founding of the Federal Reserve, it seems inappropriate to analyze the behavior of depository institutions solely from the narrow viewpoint of cash assets eligible to satisfy statutory reserve requirements. Consider, for example, the exclusion of vault cash at nonmember depository institutions from the narrow measure of total reserves discussed in section A (above) for dates prior to the Monetary Control Act. The monetary aggregates (M1, M2 and M3) were extended in 1980 to include deposits at nonmember institutions, but the narrow definition of total reserves excludes the vault cash held by these institutions to service their deposits. This argument may be extended to the inclusion of required clearing balance contracts in total reserves: Federal Reserve deposits are held to service the customer deposits included in the monetary aggregates. A desire to maintain logical consistency among measures of money and measures of total reserves suggests that narrow measures of reserves may be incomplete.

Adjusted Total Reserves

Similar to the AMB, and for the same dates, adjusted total reserves is constructed in four segments. Within each segment, adjusted total reserves equals total reserves plus RAM. The overall adjusted total reserves series is built by chaining together the four segments at the same dates and in the same manner as the AMB.

Despite common practice, a correct time series for adjusted total reserves cannot be obtained by subtracting the currency component of M1 from the AMB. Rather, adjusted reserves must be calculated from unchained data on the adjusted reserves component of the AMB, and then chained as is done to measure the AMB.

The RAM adjustment is the same RAM used for the adjusted monetary base. Monthly and biweekly data are seasonally adjusted by the same methods used for the adjusted monetary base.

Adjusted Nonborrowed Reserves

Similar to total reserves, adjusted nonborrowed reserves is constructed in four segments. Within each segment, adjusted total reserves equals total reserves plus RAM. The overall adjusted nonborrowed reserves series is built by chaining together the four segments at the same dates and in the same manner as the AMB. This procedure is necessary because a correct time series for adjusted nonborrowed reserves cannot be obtained by subtracting borrowings from chained adjusted total reserve. Rather, adjusted reserves must be calculated from unchained data on the adjusted reserves component of the AMB, and then chained as is done to measure the AMB and adjusted total reserves.

The RAM adjustment is the same RAM used for the adjusted monetary base. Monthly and biweekly data are seasonally adjusted by the same methods used for the adjusted monetary base.

Published Data Sources: See Table A-2.

Table A-2: Sources of Data on the New Adjusted Monetary Base and Reserves

References

Richard G. Anderson and Robert H. Rasche. "A Revised Measure of the St. Louis Adjusted Monetary Base." (PDF [an error occurred while processing this directive] ) This Review, March/April 1996, pp. 3-13.

Richard G. Anderson and Robert H. Rasche. "Measuring the Adjusted Monetary Base in an Era of Financial Change." (PDF [an error occurred while processing this directive] ) This Review, November/December 1996, 3-37.

Charts for the paper are available in gif format.

• Charts.zip
• Figures 1 and 2
• Figures 3 and 4
• Figure 5
• Figure 6
• Figure 7
• Figure 8
• Figure 9
• Figure 10
• Appendix: Figure 1
• Appendix: Figure 2
• Appendix: Figure 3
• Appendix: Figure 4

Albert E. Burger and Robert H. Rasche. "Revision of the Monetary Base," Federal Reserve Bank of St. Louis Review (July 1977), pp. 13-27.

John A. Tatom, "Issues in Measuring An Adjusted Monetary Base," this Review (December 1980), pp.11-29.

Comments and questions may be addressed to Richard Anderson at anderson@stls.frb.org or (314) 444-8574.