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Does liquidity matter? Properties of the synthetic divisia monetary aggregate in the Euro area

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Author Info
Livio Stracca () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

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Abstract

This paper sets out to build a synthetic quarterly Divisia monetary aggregate for the euro area using area wide data over the sample period from 1980 to 2000. Then, the analysis proceeds in two separate steps. First, the demand for this Divisia monetary aggregate is evaluated using econometric techniques. By means of a cointegrated VECM model, a theoretically plausible and stable demand function may be estimated. Second, the information content of the Divisia monetary aggregate as regards future output and inflation in the euro area is analysed. The outcome of this analysis suggests that the Divisia monetary aggregate has some information content from a forward-looking perspective, of comparable quality as simple sum M1 and M3. More in general, the paper lends further support to the view that money and "liquidity" should be assigned an important role in shaping monetary policy in the euro area. JEL Classification: E41; E52.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 079.

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Length: 54 pages
Date of creation: Oct 2001
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Handle: RePEc:ecb:ecbwps:20010079

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Related research
Keywords: EMU Divisia monetary aggregates money demand liquidity.

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Drake, Leigh & Mullineux, Andy & Agung, Juda, 1997. "One Divisia Money for Europe?," Applied Economics, Taylor and Francis Journals, vol. 29(6), pages 775-86, June. [Downloadable!] (restricted)
  2. Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, vol. 23(3), pages 483-506. [Downloadable!] (restricted)
  3. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September. [Downloadable!] (restricted)
  4. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  5. Claus Brand & Nuno Cassola, 2000. "A money demand system for Euro area M3," Working Paper Series 39, European Central Bank. [Downloadable!]
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Huw Pill & Mahmood Pradhan, 1994. "Monetary Aggregation: A Reconciliation of Theory and Central Bank Practice," IMF Working Papers 94/118, International Monetary Fund.
  8. Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, vol. 108(447), pages 363-82, March. [Downloadable!] (restricted)
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  9. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-36, November. [Downloadable!] (restricted)
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  10. Rudebusch, Glenn D & Svensson, Lars E O, 2000. "Eurosystem Monetary Targeting: Lessons from US Data," CEPR Discussion Papers 2522, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May. [Downloadable!] (restricted)
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  12. Livio Stracca, 2001. "The functional form of the demand for euro area M1," Working Paper Series 051, European Central Bank. [Downloadable!]
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  13. Belongia, Michael T, 1996. "Measurement Matters: Recent Results from Monetary Economics Reexamined," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1065-83, October. [Downloadable!] (restricted)
  14. Barnett, William A, 1997. "Which Road Leads to Stable Money Demand?," Economic Journal, Royal Economic Society, vol. 107(443), pages 1171-85, July. [Downloadable!] (restricted)
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  15. Rotemberg, J.J. & Driscoll, J.C. & Poterba, J.M., 1991. "Money, Output, and Prices: Evidence from a New Monetary Aggregate," Working papers 585, Massachusetts Institute of Technology (MIT), Department of Economics.
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  16. Hendry, S. & Zhang, G., 1998. "Liquidity Effects and Market Frictions," Working Papers 98-11, Bank of Canada. [Downloadable!]
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  17. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June. [Downloadable!] (restricted)
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  18. Serletis, Apostolos & Robb, A Leslie, 1986. "Divisia Aggregation and Substitutability among Monetary Assets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 430-46, November. [Downloadable!] (restricted)
  19. Richard G. Anderson & Barry Jones & Travis Nesmith, 1996. "Monetary aggregation theory and statistical index numbers," Working Papers 1996-007, Federal Reserve Bank of St. Louis. [Downloadable!]
  20. Katrin Wesche, 1997. "The demand for divisia money in a core monetary union," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 51-60. [Downloadable!]
  21. Cuthbertson, Keith, 1997. "Microfoundations and the Demand for Money," Economic Journal, Royal Economic Society, vol. 107(443), pages 1186-1201, July. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. William Barnett, 2004. "Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200413, University of Kansas, Department of Economics, revised Nov 2004. [Downloadable!]
    Other versions:
  2. Jane M. Binner & Rakesh K. Bissoondeeal & Thomas Elger & Alicia M. Gazely & Andrew W. Mullineux, 2005. "A comparison of linear forecasting models and neural networks: an application to Euro inflation and Euro Divisia," Applied Economics, Taylor and Francis Journals, vol. 37(6), pages 665-680, April. [Downloadable!] (restricted)
  3. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank, Research Centre. [Downloadable!]
  4. J. M. Binner & R. K. Bissoondeeal & A. W. Mullineux, 2005. "A composite leading indicator of the inflation cycle for the Euro area," Applied Economics, Taylor and Francis Journals, vol. 37(11), pages 1257-1266, June. [Downloadable!] (restricted)
  5. William A. Barnett, 2003. "Aggregation-Theoretic Monetary Aggregation over the Euro Area, when Countries are Heterogeneous," Macroeconomics 0309018, EconWPA. [Downloadable!]
    Other versions:
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