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Company-Sector Money Demand: New Evidence on the Existence of a Stable Long-Run Relationship for the United Kingdom

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  • Drake, Leigh
  • Chrystal, K Alec

Abstract

The U.K. departure from the European Exchange Rate Mechanism has created an urgent need for new indicators of monetary policy stance. Traditional simple sum monetary aggregates have proven unreliable, particularly in the face of the financial innovations of the 1980s. Micro theory suggests that inappropriate aggregation over heterogeneous assets and holders may be to blame. The present paper tests for weak separability of asset groupings for the U.K. company sector. Divisia weighted aggregates are constructed for the resulting narrow and broad groupings. It is shown that stable long run relationships, corresponding to money demand equations, exist for these aggregates. Arbitrary dummies representing financial innovation are not required, in contrast to some other work in this area. Copyright 1994 by Ohio State University Press.

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  • 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 479-494, August.
  • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:3:p:479-94
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    Cited by:

    1. Binner, Jane M. & Bissoondeeal, Rakesh K. & Elger, C. Thomas & Jones, Barry E. & Mullineux, Andrew W., 2009. "Admissible monetary aggregates for the euro area," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 99-114, February.
    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. Rayton, Bruce A. & Pavlyk, Khrystyna, 2010. "On the recent divergence between measures of the money supply in the UK," Economics Letters, Elsevier, vol. 108(2), pages 159-162, August.
    4. Kumar, Saten & Rao, B. Bhaskara, 2012. "Error-correction based panel estimates of the demand for money of selected Asian countries with the extreme bounds analysis," Economic Modelling, Elsevier, vol. 29(4), pages 1181-1188.
    5. Afees Salisu & Idris Ademuyiwa & Basiru Fatai, 2013. "Modelling the Demand for Money in Sub-Saharan Africa (SSA)," Economics Bulletin, AccessEcon, vol. 33(1), pages 635-647.
    6. William A. Barnett & Yi Liu, 1996. "Beyond the Risk Neutral Utility Function," Macroeconomics 9602001, EconWPA.
    7. Leigh Drake & Adrian Fleissig, 2004. "Admissible Monetary Aggregates and UK Inflation Targeting," Money Macro and Finance (MMF) Research Group Conference 2004 2, Money Macro and Finance Research Group.
    8. 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.
    9. William A. Barnett & Milka Kirova & Meenakshi Pasupathy, 1996. "Technology Modeling: Curvature is not Sufficient for Regularity," Econometrics 9602002, EconWPA, revised 24 Jun 1999.
    10. William Barnett & Barry E. Jones & Milka Kirova & Travis D. Nesmith & Meenakshi Pasupathy1, 2004. "The Nonlinear Skeletons in the Closet," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200403, University of Kansas, Department of Economics, revised May 2004.
    11. 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.
    12. Jane M. Binner & Alicia M. Gazely & Shu-Heng Chen, 2002. "Financial innovation and Divisia monetary indices in Taiwan: a neural network approach," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 238-247, June.
    13. John Ashworth & David Barlow & Lynne Evans, 2014. "Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK," Manchester School, University of Manchester, vol. 82(6), pages 732-750, December.
    14. Elger, Thomas & Jones, Barry & Edgerton, David & Binner, Jane, 2004. "The Optimal Level of Monetary Aggregation in the UK," Working Papers 2004:7, Lund University, Department of Economics, revised 26 Jan 2005.
    15. Andrew Brigden & Paul Mizen, 1999. "Money, credit and investment in UK corporate sector," Bank of England working papers 100, Bank of England.
    16. Rostom,Ahmed Mohamed Tawfick, 2016. "Money demand in the Arab Republic of Egypt : a vector equilibrium correction model," Policy Research Working Paper Series 7679, The World Bank.
    17. Rakesh Bissoondeeal & Michail Karoglou & Andy Mullineux, 2014. "Breaks in the UK Household Sector Money Demand Function," Manchester School, University of Manchester, vol. 82, pages 47-68, December.
    18. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
    19. Subramanian S Sriram, 1999. "Survey of Literature on Demand for Money; Theoretical and Empirical Work with Special Reference to Error-Correction Models," IMF Working Papers 99/64, International Monetary Fund.
    20. 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.
    21. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.

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