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Economic Quarterly

Summer 1997

A Review of the Recent Behavior of M2 Demand

Yash P. Mehra

Evidence indicates that special factors such as the steepening of the yield curve in the early '90s and the increased availability and liquidity of mutual funds caused the public to redirect part of its savings balances from bank deposits to bond and stock mutual funds from 1990 to 1994. Except for a one-time leftward shift in the level of M2 balances demanded by the public, the character of M2 demand may have changed little or not at all. The shift, however, ended two years ago. Therefore, the behavior of M2 may now be of interest to policymakers.

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