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The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector

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  • Ryland Thomas

Abstract

Interpreting movements in monetary aggregates is an important part of the assessment of inflationary pressures in the UK's current monetary policy framework. This paper is the first part of a follow-up study to Fisher and Vega in 1993, examining the determinants of personal sector holdings of M4 in the UK and the role they play in the transmission mechanism. A joint-model of personal sector M4 and consumption is developed which offers some useful insights into the role of money in the economy. In the long run both money and consumption are found to be related to income, wealth and interest rates, the estimated relationships being fairly standard theoretical specifications. But the model also reveals that money and consumption interact strongly in the short run, the nature of the interaction depending on the type of disturbance that has occurred. Positive disturbances to consumption initially lead to a fall in money balances, so that there is a negative relationship between money and consumption in the short-run. This is consistent with money's role as a "buffer-stock" which absorbs short-term fluctuations in spending. Positive disturbances to money, on the other hand, lead to a rise in consumption in the first instance, so that the short-run relationship is positive. This would be consistent with a number of possible liquidity and credit effects on consumption. These different relationships have important implications for interpreting movements in personal sector money holdings. Faster money growth may be consistent with a number of different underlying disturbances, each requiring its own policy response.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 61.

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Date of creation: Jun 1997
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Handle: RePEc:boe:boeewp:61

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  1. Milbourne, Ross, 1988. " Disequilibrium Buffer Stock Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 2(3), pages 187-208.
  2. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
  3. David F. Hendry & Neil R. Ericsson, 1990. "Modeling the demand for narrow money in the United Kingdom and the United States," International Finance Discussion Papers 383, Board of Governors of the Federal Reserve System (U.S.).
  4. Bardsen, G. & Fisher, P.G., 1993. "The Importance of Being Structured," Papers 02-93, Norwegian School of Economics and Business Administration-.
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  7. Drake, Leigh & Chrystal, K Alec, 1994. "Company-Sector Money Demand: New Evidence on the Existence of a Stable Long-Run Relationship for the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 479-94, August.
  8. Ross Milbourne, 1988. "Disequilibrium Buffer Stock Models: A Survey," Working Papers 715, Queen's University, Department of Economics.
  9. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  10. Urbain, J-P., 1991. "On Weak Exogeneity in Error Correction Models," Papers 9103, Liege - Centre de Recherches Economiques et Demographiques.
  11. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  12. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
  13. Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
  14. Tobin, James, 1982. " The Commercial Banking Firm: A Simple Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(4), pages 495-530.
  15. Urbain, Jean-Pierre, 1995. "Partial versus full system modelling of cointegrated systems an empirical illustration," Journal of Econometrics, Elsevier, vol. 69(1), pages 177-210, September.
  16. Neil R. Ericsson, 1994. "Conditional and structural error correction models," International Finance Discussion Papers 487, Board of Governors of the Federal Reserve System (U.S.).
  17. Mackinnon, James G & Milbourne, Ross D, 1988. "Are Price Equations Really Money Demand Equations on Their Heads?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 295-305, October-D.
  18. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
  19. Mizen, Paul, 1996. "Modeling the demand for money in the industrial and commercial companies sector in the United Kingdom," Journal of Policy Modeling, Elsevier, vol. 18(4), pages 445-467, August.
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Citations

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Cited by:
  1. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
  2. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2007. "The sectoral distribution of money supply in the Euro area," Temi di discussione (Economic working papers) 627, Bank of Italy, Economic Research and International Relations Area.
  3. K. Alec Chrystal & Paul Mizen, 2005. "Other financial corporations: Cinderella or ugly sister of empirical monetary economics?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 63-80.
  4. Seitz, Franz & von Landesberger, Julian, 2010. "Household money holdings in the euro area: An explorative investigation," Working Paper Series 1238, European Central Bank.
  5. Janine Aron & John Muellbauer, 2004. "Revised Estimates of Personal Sector Wealth for South Africa," Economics Series Working Papers WPS/2004-24, University of Oxford, Department of Economics.
  6. Chrystal, Alec & Mizen, Paul, 2002. "Modelling credit in the transmission mechanism of the United Kingdom," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2131-2154, November.
  7. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
  8. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
  9. Aron, Janine & Muellbauer, John & Prinsloo, Johan, 2006. "Estimating the Balance Sheet of the Personal Sector in an Emerging Market Country: South Africa 1975-2003," Working Paper Series RP2006/99, World Institute for Development Economic Research (UNU-WIDER).
  10. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
  11. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.

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