An alternative monetary policy target

For most of the period since the mid-1970s, the Federal Reserve has expressed its monetary policy intentions by announcing the target growth rates of three principal monetary aggregates: the simple-sum M1, M2 and M3. However, the sweeping changes and the deregulation in the financial industry have greatly affected the relevance of these traditional monetary aggregates. The unusual behaviour of the simple-sum monetary aggregates has forced the Federal Reserve to stop setting target range for M1. The measuring of monetary aggregates has become a controversial question. This paper constructs the new-benchmark Divisia monetary indexes which reflect ‘moneyness’ more accurately than the old Divisia indexes. I demonstrate that the historical trends of the Divisia monetary indexes are sensitive to the brenchmark rates chosen in constructing these indexes. In addition, I compare the forecasting performance of the new-benchmark Divisia monetary indexes with the simple-sum and the old Divisia monetary indexes in the estimated money demand functions. I find that the new-benchmark Divisia monetary indexes provide the best statis forecasting performance. The result indicate that the new-benchmark Divisia monetary indexes should be considered as alternative measures of money in studying the relationship between money and the economy.     

Rational expectations and the demand for money: A nonparametric approach

This paper tests the U.S. demand for money for evidence of the effect of rational expectations of the income and interest rate variables that enter as arguments into that function. The data employed are simple-sum and Divisia aggregates, and the nonparametric tests are of the identification and information orthogonality of the various monetary measures. The Akaike Criterion is used to distinguish among the alternative specifications. While non-rationality is the typical result, Divisia aggregates appear to be more “rational” than simple sum. There is evidence of mean-reversion in interest rates as well.     

Recent monetary policy and the credit card-augmented Divisia monetary aggregates

The main objective of this paper is to examine the information content of the credit card-augmented Divisia monetary aggregates and credit card-augmented Divisia inside monetary aggregates, recently produced by the Center for Financial Stability. We compare the inference ability of the credit card-augmented Divisia monetary aggregates and credit card-augmented Divisia inside monetary aggregates to the conventional Divisia monetary aggregates, at all levels of monetary aggregation. Using cyclical correlations analysis and Granger causality tests, we find that both the conventional Divisia monetary aggregates and the credit card-augmented Divisia monetary aggregates are informative in predicting output. Moreover, during, and in the aftermath of the 2007–2009 financial crisis, the credit card-augmented Divisia measures of money are more informative when predicting real economic activity than the conventional Divisia monetary aggregates. We also find that broad Divisia monetary aggregates provide better measures of the flow of monetary services generated in the economy.     

Divisia monetary aggregates and US GDP nowcasting

ABSTRACT

This article nowcasts US quarterly real GDP growth rate with dynamic factor model (DFM) using Divisia Monetary Aggregate Index, Divisia M1, M2, M3, and exploits information from a large, unbalanced panel data. GDP nowcasting is evaluating the current quarter GDP given the available economic data up to the point when the nowcasting is conducted. GDP data is published quarterly with a substantial lag, while many monetary and financial decisions are made at a higher frequency. Therefore, nowcasting GDP has become an increasingly important task for central banks. This article uses DFM to nowcast GDP, compares the nowcasting results from DFM with the simple sum monetary aggregate M1, M2, M3, to the Model with weighted corresponding Divisia Index, then calculates the contributions of the Divisia Monetary index to US GDP nowcasting.     

The information content of the divisia monetary aggregates in forecasting inflation in the euro area

The paper investigates the performance of a set of monetary indicators, based on the Divisia money constructed for the euro area, on forecasting euro area inflation. The paper first briefly discusses on the relative information contents of the Divisia aggregates and the simple sum aggregates. The forecasting performance of the former is then examined by means of simulated out-of-sample forecasting. In addition to examining the information contents of the Divisia aggregate constructed for M3 money, the study also examines the performance of the Divisia M1 money to gain evidence on the relative performance between the broad and narrow Divisia monetary aggregates. According to the results, only some of the monetary indicators considered can significantly improve the univariate inflation forecasts. The Divisia M3 money based monetary indicators turned out to perform better than their Divisia M1 based counterparts. The result contradicts some previous evidence on the optimal level on monetary aggregation in the context of broad versus narrow money.      

Fiscal dependence on trade taxes and the level of economic development:: a comment

We test for fractional dynamics in US monetary series, their various formulations and components, and velocity series. Using the spectral regression method, we find evidence of a fractional exponent in the differencing process of the monetary series (both simple-sum and Divisia indices), in their components (with the exception of demand deposits, savings deposits, overnight repurchase agreements, and term repurchase agreements), and the monetary base and money multipliers. No evidence of fractional behaviour is found in the velocity series. Granger's (Journal of Econometrics, 25, 1980) aggregation hypothesis is evaluated and implications of the presence of fractional monetary dynamics are drawn.     

The velocity behavior and information content of Divisia monetary aggregates

Monetary aggregates are commonly sums, although summation quantity aggregation is disreputable. We compare summation versus Divisia aggregation of monetary assets. The velocity behavior and the information content of the Divisia index are superior to those of the summation index.     

Solving the price puzzle with an alternative indicator of monetary policy

We identify the effects of monetary policy shocks on macroeconomic variables in VARs using the Divisia M4 measure of money as the policy indicator variable. We obtain theoretically sensible responses—whether or not a commodity price index is included. Thus, we eliminate the well-known empirical puzzles from the VAR by a novel choice in a policy variable, rather than the usual attachment of an ad hoc variable.     

The information content of monetary aggregates in the U.K.

This paper presents some results evaluating the information content of several monetary aggregates, formed as simple sums or as Divisia quantity indices. The former tend to dominate the latter; there is considerable support for the new, broader, official monetary aggregate PSL2.     

A divisia system approach to modelling monetary aggregates

A complete system of Divisia partial adjustment asset equations based on the augmented-price expectations Baumol-Tobin inventory and transactions postulates is used to study the dynamic behaviour of monetary aggregates and their components in Australia during 1969.III to 1983.IV. The system provides a new and useful approach to modelling demand-for-money functions for effective monetary policy controls and targetting.     

Semi-non-parametric estimates of substitution for Canadian monetary assets

We estimate the dynamic Fourier expenditure system to obtain consistent estimates of short-run and long-run Morishima elasticities of substitution for Canadian liquid assets. We argue that the variability of the estimated elasticities and evidence of less than perfect substitution between monetary assets interferes with the successful use of simple-sum aggregates and traditional log-linear money-demand functions.
Calibrations semi-non-paramétriques de la substitution pour des actifs monétaires canadiens . Les auteurs calibrent le système dynamique de dépenses à la Fourier pour obtenir des estimations cohérentes des élasticités de substitution à la Morishima à court et à long termes pour des actifs monétaires canadiens. Ils suggèrent que la variabilité des élasticités estimées et la constatation que la substitution n'est pas parfaite entre les actifs monétaires rendent difficile un usage heureux des agrégats de simple somme et des fonctions log-linéaires de demande de monnaie.     

Currency substitution and economic monetary aggregates: The U.S. Case

Existing analyses of currency substitution rely on the assumption that domestic monetary assets are perfect substitutes for each other. The present paper examines empirically the currency substitution hypothesis using Divisia monetary aggregates which relax the perfect substitutability assumption used in earlier work. The empirical results support the hypothesis of currency substitution for the United States.     

FORECASTING THE UK/US EXCHANGE RATE WITH DIVISIA MONETARY MODELS AND NEURAL NETWORKS

This paper compares the UK/US exchange rate forecasting performance of linear and nonlinear models based on monetary fundamentals, to a random walk (RW) model. Structural breaks are identified and taken into account. The exchange rate forecasting framework is also used for assessing the relative merits of the official Simple Sum and the weighted Divisia measures of money. Overall, there are four main findings. First, the majority of the models with fundamentals are able to beat the RW model in forecasting the UK/US exchange rate. Second, the most accurate forecasts of the UK/US exchange rate are obtained with a nonlinear model. Third, taking into account structural breaks reveals that the Divisia aggregate performs better than its Simple Sum counterpart. Finally, Divisia‐based models provide more accurate forecasts than Simple Sum‐based models provided they are constructed within a nonlinear framework.     

货币中介目标的国际比较*——基于DAG SVAR模型

学术界围绕最优货币中介目标的选择,在利率、简单加总货币量、迪维西亚货币量之间争论不休。本文基于DAG SVAR模型,分别对美国、欧元区、英国的银行间隔夜拆借利率R、简单加总货币量M2、迪维西亚货币量D2对物价P、产出Y影响的相对重要性进行实证比较。结果发现,在美国,M2对Y的影响最大,R对P的影响最大;在欧元区,D2对Y的影响最大,M2对P的影响最大;在英国,M2对Y和P的影响都最大。总的来说,若货币最终目标是经济增长,则美国、英国的最优中介目标是简单加总货币量,欧元区的最优中介目标是迪维西亚货币量;若货币最终目标是物价稳定,则美国的最优中介目标是利率,欧元区、英国的最优中介目标是简单加总货币量。由此可见,对于不同的经济体或者不同的货币最终目标,最优中介目标的选择可能有所不同。本文的研究结论在一定程度上是对“利率普遍优于货币量,迪维西亚货币量普遍优于简单加总货币量”学术共识的反向补充。     

The application of neural networks to the Divisia index debate: evidence from three countries

If monetary policy is to be effective in controlling the macroeconomy, accurate measurement of the money supply is essential. The conventional way of measuring the level of the money supply is to simply sum the constituent liquid liabilities of banks. However, a more sophisticated, weighted monetary index has been proposed to take account of the varying degrees of liquidity of the short-term instruments included in money. Inferences about the effects of money on economic activity may depend importantly on the choice of monetary index because simple sum aggregates cannot internalize pure substitution effects. This hypothesis is investigated in the current paper. A Divisia index measure of money is constructed for the USA, UK and Italian economies and its inflation forecasting potential is compared with that of its simple sum counterpart in each of the three countries. The powerful Artificial Intelligence technique of neural networks is used to allow a completely flexible mapping of the variables and a greater variety of functional form than is currently achievable using conventional econometric techniques. The application of neural network methodology to examine the money-inflation link is highly experimental in nature and, hence, the overriding feature of this research is one of simplicity. Superior inflation forecasting models are achieved when a Divisia M2 measure of money is used in the majority of cases. This support for Divisia is entirely consistent with findings based on standard econometric techniques reported from the respective central and Federal Reserve banks of each country. Divisia monetary aggregates appear to offer advantages over their simple sum counterparts as macroeconomic indicators. Further, the combination of Divisia measures of money with the artificial neural network offers a promising starting point for improved models of inflation.     

Financial Innovation and Divisia Money in Taiwan: Comparative Evidence from Neural Network and Vector Error-Correction Forecasting Models

In this article a Divisia monetary index is constructed for the Taiwan economy, and its inflation forecasting potential is compared with that of its traditional simple sum counterpart. The Divisia index is adjusted in two ways to allow for the financial liberalization that Taiwan has experienced since the 1970s. The powerful artificial intelligence technique of neural networks is used and is found to beat the conventional econometric techniques in a simple inflation forecasting experiment. The preferred inflation forecasting model is achieved using networks that employ a Divisia M2 measure of money that has been adjusted to incorporate a learning mechanism to allow individuals to gradually alter their perceptions of the increased productivity of money. The explanatory power of the two innovation-adjusted Divisia aggregates dominates that of the simple sum counterpart in the majority of cases. (JEL C4 , E4 , E5 )     

THE SUITABILITY OF THE DIVISIA INDEX FOR THE MEASUREMENT OF ECONOMIC AGGREGATES

This paper considers the properties of the Divisia, or chain-link, index, as they relate to the argument that this is the most appropriate index for use in studying the sources of economic growth. The great advantage of the Divisia index is alleged to be its "accuracy", that is, its capacity to combine time series of prices and quantities to give a true reflection of the height of a utility or production function over time. The paper shows that there are circumstances where the confidence in the accuracy of the Divisia index is justified, but that the conditions required are very restrictive and typically do not obtain in the contexts where the Divisia index is used. Misplaced confidence in the Divisia index has led to errors of interpretation that might otherwise have been avoided, and has given rise to a distorted view of the process of economic growth.     

Divisia moments of U.S. consumption, 1929–1982

Using U.S. consumption data for 1929 to 1982, Divisia price and volume indexes are computed as well as Divisia variances and covariances. The quantity variances tend to be larger than the price variances, and the majority of the price-quantity covariances is negative.     

Monetary aggregates and core inflation: evidence from India

This study constructs a model-based core inflation for India using Divisia monetary aggregates instead of traditional money measures with the methodology proposed by Bagliano and Morana (2003) and evaluates its forecasting abilities. The core inflation derived from Divisia monetary aggregates is found to be a better leading indicator of measured inflation than the core inflation derived from traditional money measures. These results argue for a case in favour of using monetary aggregates in the construction of core inflation for policy purposes.     

A composite leading indicator of the inflation cycle for the Euro area

We evaluate the performance of composite leading indicators of turning points of inflation in the Euro area, constructed by combining the techniques of Fourier analysis and Kalman filters with the National Bureau of Economic Research methodology. In addition, the study compares the empirical performance of Euro Simple Sum and Divisia monetary aggregates and provides a tentative answer to the issue of whether or not the UK should join the Euro area. Our findings suggest that, first, the cyclical pattern of the different composite leading indicators very closely reflect that of the inflation cycle for the Euro area; second, the empirical performance of the Euro Divisia is better than its Simple Sum counterpart and third, the UK is better out of the Euro area.