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Are money and consumption additively separable in the euro area? A non-parametric approach

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Author Info
Barry E. Jones () (Assistant Professor, Department of Economics, State University of New York at Binghamton, PO Box 6000, Binghamton, NY 13902-6000, USA.)
Livio Stracca () (Counsellor to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

We propose a numerical test of the non-parametric conditions for additive separability between consumption and real money balances, building on Varian (1983). If additive separability is rejected, then real balances enter into the theoretical IS curve. We test whether or not monetary assets and consumption are additively separable for the euro area using quarterly data from 1991 to 2005. Previous results using a parametric approach suggest that real balances can be excluded from the IS curve. We find that additive separability is violated over this sample period. After 1992, however, violations involve only a few observations and are in some instances related to measurement problems in the data. Overall, our results tend to support the claim that perfect non-separability between consumption and real balances is implausible, but that non-separabilities may not be very important empirically. At the same time, we reject additive separability throughout if we extend the sample period back to the 1980s, a period characterised by higher volatility in inflation and money growth. JEL Classification: C14, C63, E41.

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Paper provided by European Central Bank in its series Working Paper Series with number 704.

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Length: 46 pages
Date of creation: Dec 2006
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Handle: RePEc:ecb:ecbwps:20060704

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Keywords: Non-parametric testing; Revealed Preference; Additive Separability; Money; IS Curve.;

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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. Pierre-Richard Agénor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 120, Economics, The Univeristy of Manchester. [Downloadable!]
  2. Matteo Ciccarelli & Carlo Altavilla, 2007. "Inflation forecasts, monetary policy and unemployment dynamics: evidence from the US and the euro area," Working Paper Series 725, European Central Bank. [Downloadable!]
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  3. Rasmus Rüffer & Marcelo Sánchez & Jian-Guang Shen, 2007. "Emerging Asia’s growth and integration - how autonomous are business cycles?," Working Paper Series 715, European Central Bank. [Downloadable!]
  4. Julian von Landesberger, 2007. "Sectoral money demand models for the euro area based on a common set of determinants," Working Paper Series 741, European Central Bank. [Downloadable!]
  5. Dieter Gerdesmeier & Francesco Paolo Mongelli & Barbara Roffia, 2007. "The Eurosystem, the US Federal Reserve and the Bank of Japan - similarities and differences," Working Paper Series 742, European Central Bank. [Downloadable!]
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  6. Berger, Helge & Österholm, Pär, 2007. "Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs," Working Paper Series 2007:30, Uppsala University, Department of Economics. [Downloadable!]
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  7. Erwan Gautier & Ignacio Hernando & Philip Vermeulen & Daniel Dias & Maarten Dossche & Roberto Sabbatini & Harald Stahl, 2007. "Price setting in the euro area: some stylised facts from individual producer price data," Working Paper Series 727, European Central Bank. [Downloadable!]
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