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The demand for Divisia money in the United States: evidence from the CFS Divisia M3 aggregate

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  • Gabriel De La Fuente
  • Luis P. De La Horra
  • Javier Perote

Abstract

In this paper, we analyse the demand for real money balances in the United States for the period 1990Q1–2017Q2 using a novel Divisia monetary aggregate developed by Barnett et al. (2013). Unlike simple-sum aggregates, Divisia aggregates take into account the different degrees of ‘moneyness’ of each monetary asset. In addition, Divisia aggregates have shown to be empirically superior to simple-sum aggregates, providing stable money demand functions for different periods and countries. In a first stage, we test for cointegration and estimate a long-run equilibrium model. In a second stage, we estimate an error correction model to study the short-run dynamics. Consistent with previous research, our findings show the existence of a stable money demand function, which suggests that monetary aggregates, when properly measured, can be useful tools in the conduct of monetary policy.

Suggested Citation

  • Gabriel De La Fuente & Luis P. De La Horra & Javier Perote, 2020. "The demand for Divisia money in the United States: evidence from the CFS Divisia M3 aggregate," Applied Economics Letters, Taylor & Francis Journals, vol. 27(1), pages 41-45, January.
    • Handle: RePEc:taf:apeclt:v:27:y:2020:i:1:p:41-45
    DOI: 10.1080/13504851.2019.1606403
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    Cited by:

    1. Barnett, William A. & Ghosh, Taniya & Adil, Masudul Hasan, 2022. "Is money demand really unstable? Evidence from Divisia monetary aggregates," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 606-622.
    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).

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