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Monetary Aggregation and the Demand for Assets

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  • Fisher, Douglas
  • Fleissig, Adrian R

Abstract

In this paper we consider and illustrate a solution to the inter-related problems of monetary aggregation and estimation of money demand. The problem with the definition of money is that the relative prices of the monetary components fluctuate over time, rendering simple-sum aggregates inefficient. The authors apply Revealed Preference tests to the U.S. monthly data to determine admissible and separable components. These components are then aggregated using the Divisia technique. To deal with the problem of money demand, the dynamic Fourier expenditure system is used to provide estimates of the elasticities of substitution. These, while showing general substitution among the liquid assets studied, are quite variable over time. This finding underscores the inefficiency of both simple-sum aggregation and single-equation, log-linear money-demand estimation. Copyright 1997 by Ohio State University Press.

Suggested Citation

  • 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 458-475, November.
  • Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:4:p:458-75
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    Cited by:

    1. Barnett, William A. & de Peretti, Philippe, 2009. "Admissible Clustering Of Aggregator Components: A Necessary And Sufficient Stochastic Seminonparametric Test For Weak Separability," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S2), pages 317-334, September.
    2. Cherchye, Laurens & Demuynck, Thomas & De Rock, Bram & Hjertstrand, Per, 2015. "Revealed preference tests for weak separability: An integer programming approach," Journal of Econometrics, Elsevier, vol. 186(1), pages 129-141.
    3. 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.
    4. David Edgerton & Donald Dutkowsky & Thomas Elger & Barry Jones, 2005. "Toward a unified approach to testing for weak separability," Economics Bulletin, AccessEcon, vol. 3(20), pages 1-7.
    5. Jones, Barry E. & Stracca, Livio, 2006. "Are money and consumption additively separable in the euro area? A non-parametric approach," Working Paper Series 704, European Central Bank.
    6. Fisher, Douglas & Fleissig, Adrian R. & Serletis, Apostolos, 1998. "Monetary aggregation, rational expectations, and the demand for money in the United States," The North American Journal of Economics and Finance, Elsevier, vol. 9(1), pages 1-13.
    7. Bergh , Andreas & Nilsson, Therese, 2008. "Do economic liberalization and globalization increase income inequality?," Working Papers 2008:12, Lund University, Department of Economics.
    8. Jones, Barry E. & Fleissig, Adrian R. & Elger, Thomas & Dutkowsky, Donald H., 2008. "Retail sweep programs and monetary asset substitution," Economics Letters, Elsevier, vol. 99(1), pages 159-163, April.
    9. Hjertstrand, Per, 2013. "A Simple Method to Account for Measurement Errors in Revealed Preference Tests," Working Paper Series 990, Research Institute of Industrial Economics.
    10. 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.
    11. Haroon Sarwar & Zakir Hussain & Masood Sarwar, 2011. "A Semi-Nonparametric Approach to the Demand for Money in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(2), pages 87-110, Jul-Dec.
    12. Jones, Barry E. & Fleissig, Adrian R. & Elger, Thomas & Dutkowsky, Donald H., 2008. "Monetary policy and monetary asset substitution," Economics Letters, Elsevier, vol. 99(1), pages 18-22, April.
    13. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
    14. Elger, Thomas & Jones, Barry E. & Nilsson, Birger, 2006. "Forecasting with Monetary Aggregates: Recent Evidence for the United States," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 428-446.
    15. Fleissig, Adrian R. & Jones, Barry E., 2015. "The impact of commercial sweeping on the demand for monetary assets during the Great Recession," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 412-422.
    16. Massoud, Nadia, 2005. "How should Central Banks determine and control their bank note inventory?," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3099-3119, December.
    17. 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.
    18. Binner, Jane & Elger, Thomas & de Peretti, Philipe, 2002. "Is UK Risky Money Weakly Separable? A Stochastic Approach," Working Papers 2002:13, Lund University, Department of Economics.
    19. Serletis, Apostolos & Rangel-Ruiz, Ricardo, 2005. "Microeconometrics and measurement matters: Some results from monetary economics for Canada," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 307-330, June.
    20. Hjertstrand, Per & Jones, Barry E., 2013. "What Do Revealed Preference Axioms Reveal about Elasticities of Demand?," Working Paper Series 972, Research Institute of Industrial Economics.
    21. 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.

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