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Economic Commentary

Understanding the Recent Behavior of M2

The behavior of the monetary aggregates— particularly M2—is often an important consideration in the Federal Reserve’s monetary policy decisions. The Federal Open Market Committee (FOMC), the monetary policymaking arm of the Federal Reserve System, periodically sets a target range for M2 growth, based on economic conditions and on its policy stance. In order to steer M2 growth within these bounds (currently 2’/2 and 6V2 percent), policymakers must be able to predict with precision the demand for M2. This entails understanding why individuals and institutions hold transactions and savings deposits. The determining factors have traditionally been the level of income and the opportunity cost of holding M2 balances. Until recent years, these factors have accurately predicted M2 growth.

The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit for updates.

Suggested Citation

Carlson, John B., and Sharon Parrott. 1991. “Understanding the Recent Behavior of M2.” Federal Reserve Bank of Cleveland, Economic Commentary 6/15/1991.

This work by Federal Reserve Bank of Cleveland is licensed under Creative Commons Attribution-NonCommercial 4.0 International