The Case for Divisia Money Targeting

Serletis, Apostolos; Rahman, Sajjadur

doi:10.1017/s1365100512000247

Cited by 20 publications

(13 citation statements)

References 16 publications

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“…By eschewing those assumptions, the policy rule Keating and Smith (2013a) nominal GDP targeting were to be adopted. Alternatively, advocates of Friedman's preference for monetary targeting will find support for Divisia monetary targeting in Serletis and Rahman (2013). 22 Divisia monetary aggregates are not only relevant to New Keynesian models, but more relevant than commonly believed to classical real business cycle models, as found by Serletis and Gogas (2014).…”

Section: Discussionmentioning

confidence: 99%

Friedman and Divisia Monetary Measures

Barnett¹

2016

Milton Friedman

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procedure is a very special case of the more general approach. In brief, the general approach consists of regarding each asset as a joint product having different degrees of 'moneyness,' and defining the quantity of money as the weighted sum of the aggregated value of all assets, the weights for individual assets varying from zero to unity with a weight of unity assigned to that asset or assets regarded as having the largest quantity of 'moneyness' per dollar of aggregate value. The procedure we have followed implies that all weights are either zero or unity.The more general approach has been suggested frequently but experimented with only occasionally. We conjecture that this approach deserves and will get much more attention than it has so far received." [Friedman and Schwartz, (1970, pp. 151-152)]

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Section: Discussionmentioning

confidence: 99%

Friedman and Divisia Monetary Measures

Barnett¹

2016

Milton Friedman

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“…The results indicate stronger comovements between CPI inflation and growth in Divisia monetary aggregates than between inflation and growth rates in simple sum aggregates. Reference [12] investigate the relationship between money growth uncertainty and the level of economic activity in the United States. They use a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model, and they show that increased Divisia money growth volatility is associated with a lower average growth rate of real economic activity.…”

Section: Introductionmentioning

confidence: 99%

Money Neutrality, Monetary Aggregates and Machine Learning

2019

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The issue of whether or not money affects real economic activity (money neutrality) has attracted significant empirical attention over the last five decades. If money is neutral even in the short-run, then monetary policy is ineffective and its role limited. If money matters, it will be able to forecast real economic activity. In this study, we test the traditional simple sum monetary aggregates that are commonly used by central banks all over the world and also the theoretically correct Divisia monetary aggregates proposed by the Barnett Critique (Chrystal and MacDonald, 1994; Belongia and Ireland, 2014), both in three levels of aggregation: M1, M2, and M3. We use them to directionally forecast the Eurocoin index: A monthly index that measures the growth rate of the euro area GDP. The data span from January 2001 to June 2018. The forecasting methodology we employ is support vector machines (SVM) from the area of machine learning. The empirical results show that: (a) The Divisia monetary aggregates outperform the simple sum ones and (b) both monetary aggregates can directionally forecast the Eurocoin index reaching the highest accuracy of 82.05% providing evidence against money neutrality even in the short term.

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“…Subsequent studies with those data demonstrated that Divisia monetary aggregates are better measures than simple sum monetary aggregates in terms of policy criteria, such as causality and information content of the aggregate and stability of money demand equations. See, e.g., Spindt (1981, 1984), Belongia and Ireland (2006, 2015a,b,2016, Serletis and Rahman (2013), and Serletis and Gogas (2014).…”

Section: Introductionmentioning

confidence: 99%

The Demand for Money for EMU: a Flexible Functional Form Approach

Barnett

Gaekwad

2018

Open Econ Rev

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Monetary aggregates have a special role under the "two pillar strategy" of the ECB. Hence, the need for a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the EMU-11 countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate in accordance with Barnett (2007). The multilateral Divisia monetary aggregate for the EMU-11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU-11 within the framework of a representative consumer's utility function, using Barnett's (1983) locally flexible functional form, the minflex Laurent Indirect utility function. The analysis of elasticities with respect to the asset's user-cost prices shows that: (i) transaction balances (TB) and deposits redeemable at notice (DRN) are income elastic, (ii) the DRN display large variation in price elasticity, and (iii) the monetary assets are not good substitutes for each other within the EMU-11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB has Divisia monetary aggregates provided to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City.JEL Classification: C43, C82, D12, E51, F33.

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The Case for Divisia Money Targeting

Cited by 20 publications

References 16 publications

Friedman and Divisia Monetary Measures

Friedman and Divisia Monetary Measures

Money Neutrality, Monetary Aggregates and Machine Learning

The Demand for Money for EMU: a Flexible Functional Form Approach

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