Sweep Programs: The Fall of M1 and Rebirth of the Medium of Exchange

This paper investigates the effect of sweep programs on M1 using dynamic simulations of money demand over 1994-2000. The postsample period constitutes when sweep programs have been in effect. All models generate predictions systematically above reported M1. Using data on newly initiated programs, test findings indicate that sweeps account for the overprediction within the conventional money demand model with a long-term interest rate. We construct a medium of exchange measure, M/S, equal to M1 plus estimated holdings of sweep balances. M/S velocity compares favorably with that of broader aggregates. Evidence indicates cointegration within M/S money demand.