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The Optimal Level of Monetary Aggregation in the UK

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Author Info

  • Elger, Thomas

    (Department of Economics, Lund University)

  • Jones, Barry

    ()
    (Department of Economics, Binghampton University)

  • Edgerton, David

    ()
    (Department of Economics, Lund University)

  • Binner, Jane

    ()
    (University of Sheffield Management School)

Abstract

This paper tests the weak separability of the assets in the Bank of England's household-sector Divisia index from 1977Q1 to 2000Q4. The study is based on a revealed preference framework and uses a nonparametric procedure that jointly tests necessary and sufficient conditions for weak separability, allows for incomplete adjustment of expenditure on monetary services, and allows for measurement errors in the monetary quantity data. The assets included in the Bank of England Divisia index are weakly separable with complete adjustment in two sub-samples covering most of the eighties. A narrower aggregate is weakly separable with complete adjustment in each sub-sample we investigated.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2004:7.

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Length: 33 pages
Date of creation: 09 Mar 2004
Date of revision: 26 Jan 2005
Publication status: Published in Macroeconomic Dynamics, 2008, pages 117-131.
Handle: RePEc:hhs:lunewp:2004_007

Note: This paper has been published as "A Note on the Optimal Level of Monetary Aggregation in the UK."
Contact details of provider:
Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: weak separability; incomplete adjustment; measurement error;

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References

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  1. Fleissig, Adrian R & Whitney, Gerald A, 2003. "A New PC-Based Test for Varian's Weak Separability Conditions," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 133-44, January.
  2. 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.
  3. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  4. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005.
  5. Michael T. Belongia & K. Alec Chrystal, 1989. "An admissible monetary aggregate for the United Kingdom," Working Papers 1989-007, Federal Reserve Bank of St. Louis.
  6. 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.
  7. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
  8. Patterson, Kerry D, 1991. "A Non-parametric Analysis of Personal Sector Decisions on Consumption, Liquid Assets and Leisure," Economic Journal, Royal Economic Society, vol. 101(408), pages 1103-16, September.
  9. Svensson, Lars E. O., 2003. "Comment on: The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1061-1070, July.
  10. Barnett, William A & Choi, Seungmook, 1989. "A Monte Carlo Study of Tests of Blockwise Weak Separability," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 363-77, July.
  11. Drake, Leigh, 1996. "Relative Prices in the UK Personal Sector Money Demand Function," Economic Journal, Royal Economic Society, vol. 106(438), pages 1209-26, September.
  12. Swofford, James L & Whitney, Gerald A, 1987. "Nonparametric Tests of Utility Maximization and Weak Separability for Consumption, Leisure and Money," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 458-64, August.
  13. Fisher, Douglas & Fleissig, Adrian R, 1997. "Monetary Aggregation and the Demand for Assets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 458-75, November.
  14. Drake, Leigh & Chrystal, K Alec, 1997. "Personal Sector Money Demand in the UK," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 188-206, April.
  15. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
  16. Leigh Drake, 1997. "Nonparametric Demand Analysis Of U.K. Personal Sector Decisions On Consumption, Leisure, And Monetary Assets: A Reappraisal," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 679-683, November.
  17. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
  18. Varian, Hal R, 1983. "Non-Parametric Tests of Consumer Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 99-110, January.
  19. Jones, Barry E. & Dutkowsky, Donald H. & Elger, Thomas, 2005. "Sweep programs and optimal monetary aggregation," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 483-508, February.
  20. Swofford, James L. & Whitney, Gerald A., 1994. "A revealed preference test for weakly separable utility maximization with incomplete adjustment," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 235-249.
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Cited by:
  1. Drake, Leigh & Fleissig, Adrian R., 2010. "Substitution between monetary assets and consumer goods: New evidence on the monetary transmission mechanism," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2811-2821, November.
  2. William Barnett & Apostolos Serletis, 2008. "Consumer preferences and demand systems," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200801, University of Kansas, Department of Economics, revised Jan 2008.
  3. Jones, Barry E. & Stracca, Livio, 2006. "Are money and consumption additively separable in the euro area? A non-parametric approach," Working Paper Series 0704, European Central Bank.

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