When economists look at the financial asset prices, do they adjust them by something like M2 in order to judge how valued something is compared to the previous historic periods? It seems like otherwise one is looking at a non-normalized version of the data, no?
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Should asset prices be always normalized by M2?
No because M2 would not appropriately correct for value in the previous time period.
When economists look at the financial asset prices, do they adjust them by something like M2 in order to judge how valued something is compared to the previous historic periods?
Economists use deflators not M2. Using deflator all dollar values are expressed in the same historical units. For example, if something has value 100 in 2010 and 250 in 2020 and deflator between the two time periods is 2 because price level doubled you can express the 250 in 2010 dollars by calculating 250/2=125 making the two values comparable across history.
answered Jun 27, 2022 at 15:04
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1$\begingroup$ why M2 would not correct appropriately? Is it because not all money supply is flows into financial assets? $\endgroup$ Commented Jun 27, 2022 at 15:13
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1$\begingroup$ @spacemonkey because m2 doesnt always have an effect since it’s not only variable that determines price level. You don't want just use random variables, for example you wouldn't want to use the volume of precipitation per year to adjust the prices. m2 is in this context not completely random, but the relationship is not straightforward. With deflator you will get the most accurate correction. $\endgroup$– 1muflon1 ♦Commented Jun 27, 2022 at 15:23
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$\begingroup$ 1muflon1, by deflator you mean adjusting for inflation? $\endgroup$ Commented Jun 27, 2022 at 16:14
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$\begingroup$ @spacemonkey well it’s actually for price level, but inflation is positive change in price level so yes in case there was increase in aggregate prices $\endgroup$– 1muflon1 ♦Commented Jun 27, 2022 at 16:18