Interest Rate Spreads as Indicators for Monetary Policy

Traditionally, economists have focused on aggregate money stock measures such as M 1 and M2 as indicators of future economic activity. However, the relationship between these aggregates and real GDP has deteriorated in recent years. Thus there is a growing interest in alternative indicators, some of which are conceptually quite new compared to the conventional financial market aggregates. For example, Kashyap, Stein, and Wilcox (1993) examine the ratio of bank loans to the sum of both bank loans and funds raised through issuing commercial paper by firms.