A Note on the Optimal Level of Monetary Aggregation in the United Kingdom

Abstract

Weak separability is a key admissibility property in the Divisia approach to monetary aggregation. We test groups of U.K. household sector monetary assets for weak separability using new data underlying the Bank of England's benchmark revision of its household sector Divisia index. Nonparametric tests are used to identify four monetary asset groupings, which are weakly separable over all or almost all of the post-ERM period (1992:4–2005:1). We construct Divisia monetary aggregates for these four groupings and investigate their information content in two applications. The main findings are that Divisia money has direct effects on aggregate demand and that the growth rates of the nominal Divisia monetary aggregates Granger cause nominal output growth, but not inflation.

Admissible monetary aggregates for the euro area

“…25 The finding that the several asset groupings are weakly separable mirrors similar findings for the UK (e.g. Elger, Jones, Edgerton, and Binner, 2006) and for the US (e.g. Jones, Dutkowsky, and Elger, 2005).…”

Does Money Matter in the Is Curve? The Case of the Uk

“…Nelson (2002), for example, finds that the growth rate of the real monetary base is statistically significant in a backward‐looking specification of the IS curve. Elger et al. (2008) find that the same is true for household‐sector Divisia monetary aggregates.…”

Substitution between monetary assets and consumer goods: New evidence on the monetary transmission mechanism

“…is the depreciation rate, p it is the price of good i, and E t p it+1 is the expected price of good i. data violate revealed preference over the sample 1977.1-2005.3 as in Drake and Fleissig (2008) and Elger et al (2008). Thus conclusions about optimal consumer behavior over the sample 1977.1-2005.3 are a joint test of utility optimization and misspecification of the utility function.…”

“…Given the conversion of many large building societies into plc banks, using a sample where the data are consistent with GARP is likely to provide more precise estimates of substitution because the data can be rationalized by a data generating function. Consequently, we follow the approach of Belongia and Chalfant (1989), Whitney (1987, 1988), Drake and Fleissig (2008) and Elger et al (2008) to establish a sample that is consistent with utility optimization. Additional testing established that the data are consistent with GARP over the period 1990.1-2005.3 which implies that there exists a utility function over this sample that rationalizes the data.…”

“…We also follow the non-parametric approach established by Whitney (1987, 1988) to test if data are consistent with utility maximization. This approach has been applied to UK data by Patterson (1991), Drake (1997), Drake et al (2003) and Elger et al (2008). 4 After establishing utility maximization for the assets and goods, we construct Divisia aggregates from the monetary assets, non-durable goods and services expenditure.…”