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Financial Innovation and Divisia Monetary Aggregates

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  • Ford, J L
  • Peng, W S
  • Mullineux, Andy W

Abstract

Rapid financial innovation in the U.K. has altered the relative liquidity and productivity of financial assets. This paper shows that even a sophisticated (Divisia) monetary index does not adequately allow for the effects of financial innovation. Two modifications to Divisia monetary aggregates are proposed to capture the effects of: non-neutral transaction technology progress; and of the introduction of new financial assets. The empirical analysis reveals that the modified Divisia aggregates dominate the basic, innovation-neutral Divisia indices. The results presented in this paper strongly support the view that, because of the widespread financial innovations during the 1980s, the conventional broad monetary aggregates provide a misleading picture of the stance of monetary policy. Copyright 1992 by Blackwell Publishing Ltd

Suggested Citation

  • Ford, J L & Peng, W S & Mullineux, Andy W, 1992. "Financial Innovation and Divisia Monetary Aggregates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(1), pages 87-102, February.
  • Handle: RePEc:bla:obuest:v:54:y:1992:i:1:p:87-102
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    Cited by:

    1. Dahalan, Jauhari & Sharma, Subhash C. & Sylwester, Kevin, 2005. "Divisia monetary aggregates and money demand for Malaysia," Journal of Asian Economics, Elsevier, vol. 15(6), pages 1137-1153, January.
    2. Andrew William (Andy) Mullineux, 2010. "Financial innovation and social welfare," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(3), pages 243-256, July.

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