The demand for divisia M1, M2, and M3 in the United States

This paper analyzes the demand for broad money measures and estimates the degree of substitution between Divisia money, defined from narrow to broad, and the “nested like assets” at different levels of aggregation. The analysis is conducted within a microtheoretical framework-utilizing the demand-system approach- and makes use of the Strotz-Gorman multistage optimization framework. Another pleasing feature of our approach is the systematic testing for the appropriateness of the weak separability (aggregation) conditions at the various levels of aggregation.