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U.K. household-sector money demand during Brexit and the pandemic

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  • Fleissig, Adrian R.
  • Jones, Barry E.

Abstract

Conventional monetary aggregates assume perfect substitutability between monetary assets. We use monthly household-sector data to estimate two versions of the dynamic Fourier demand model to determine the degree of substitutability between U.K. monetary assets and find strong evidence against perfect substitution throughout our sample. Evidence of inelastic substitution is stronger after the 2008–09 recession and some elasticities of substitution are relatively low either following the Brexit vote or during the onset of the pandemic. Our results strongly support using Divisia monetary aggregates to gauge the effects of monetary policy in the U.K., since they do not impose any assumptions about substitutability. Annual growth rates of comparable household-sector Divisia and simple sum monetary aggregates had converged just before the start of the pandemic. Subsequently, money growth increased sharply and the simple sum increasingly understated the annual money growth rate compared to Divisia with the difference exceeding two percent by early 2021.

Suggested Citation

  • Fleissig, Adrian R. & Jones, Barry E., 2023. "U.K. household-sector money demand during Brexit and the pandemic," Economic Modelling, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:ecmode:v:123:y:2023:i:c:s0264999323000469
    DOI: 10.1016/j.econmod.2023.106234
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    More about this item

    Keywords

    Asset demand; Brexit; EU exit; Morishima elasticity of substitution; Dynamic fourier flexible functional form; Divisia monetary aggregates;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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