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Structural changes and the role of monetary aggregates in the UK

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  • Bissoondeeal, Rakesh K.
  • Karoglou, Michail
  • Binner, Jane M.

Abstract

We investigate whether or not monetary aggregates are important in determining output. In addition to the official Simple Sum measure of money, we employ the sophisticated weighted Divisia aggregate. We also investigate whether or not the influence of money on output is time varying using data-driven procedures to identify breaks in the data and conduct estimations for the different segments defined by these breaks. We find that structural breaks do exist in some of the variables under investigation and these do influence the relationship between monetary aggregates and output. However, the official Simple Sum aggregate appears to be more affected by the breaks than the theoretically superior Divisia aggregate. In particular, our results show that in some segments of our data, the Simple Sum aggregate does not influence output significantly whereas the Divisia aggregate maintains a significant relationship with output in all segments. We conclude that Divisia money is still influencing output in spite of the diminished role played in monetary policy. Our investigation also suggests that the recovery from the financial crisis using quantitative easing would have been faster if money was not being hoarded.

Suggested Citation

  • Bissoondeeal, Rakesh K. & Karoglou, Michail & Binner, Jane M., 2019. "Structural changes and the role of monetary aggregates in the UK," Journal of Financial Stability, Elsevier, vol. 42(C), pages 100-107.
    • Handle: RePEc:eee:finsta:v:42:y:2019:i:c:p:100-107
    DOI: 10.1016/j.jfs.2019.05.007
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    Cited by:

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    2. Zhan, Minghua & Wang, Lijun & Zhan, Shuwei & Lu, Yao, 2023. "Does digital finance change the stability of money demand function? Evidence from China," Journal of Asian Economics, Elsevier, vol. 88(C).
    3. Barlow, David, 2023. "The stability of UK households Divisia money balances," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 451-459.

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    More about this item

    Keywords

    Divisia monetary aggregates; IS curve; Structural breaks; Quantitative easing;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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