Sweep-Adjusted Monetary Aggregates for the United States

Sweep Programs

In a sweep program, banks move a portion of funds from customer demand deposits or other checkable deposits into instruments with zero statutory reserve requirements. Under retail sweep programs, which began in January 1994, banks move funds from demand deposits or other checkable deposits into money market deposit accounts as part of savings accounts. Customers have unrestricted checking privileges on both swept and unswept funds; in fact, the sweeping process is generally invisible to the customers. Under commercial demand deposit sweep programs, banks establish investment accounts with their customers that are linked to their demand deposits. Banks maintain a predetermined target balance in demand deposits by sweeping funds to or from the linked investment account as needed. Though commercial demand deposit sweep programs have existed since the 1970s, funds in these sweep accounts have increased sharply since the mid-1990s.

Sweep programs create distortions between reported data on the monetary aggregates and accurate measures of the money stock. Swept funds from retail and commercial demand deposit programs provide the same transactions services as checkable deposits. But since they are recorded within the instruments that received the swept funds, measures of the monetary aggregates are distorted as a result. Retail sweep programs have been cited as a cause of the well-known distortion of M1 beginning in the mid-1990s. Retail sweep programs do not affect the broader monetary aggregates, because they all include savings deposits.

But in Cynamon, Dutkowsky, and Jones (2006), we show that the presence of commercial demand deposit sweep programs results in further underreporting of transactions deposits. Since the account holder views the entire balance, swept and unswept, as the relevant transactions account, swept balances need to be treated as checkable deposits within the monetary aggregates. This distortion takes place in both the narrow and broad monetary aggregates.

Reference
Cynamon, Barry Z., Donald H. Dutkowsky, and Barry E. Jones. "Redefining the Monetary Aggregates: A Clean Sweep." Eastern Economic Journal, 2006, vol. 32, issue 4, pages 661-673.