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Divisia money in a composite leading indicator of inflation

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  • J. M. Binner
  • A. Fielding
  • A. W. Mullineux

Abstract

The principal objective of this paper is to compare the performance of the Divisia M4 monetary index with the standard Simple Sum measure of broad money in the context of composite leading indicators of inflation in the United Kingdom. Inflation targeting is an important component of current UK monetary policy and the construction of composite leading indicators of inflation is a potential advance over the current practice of monitoring a range of indicators of inflation. The leading indicators proposed provide useful turning point information for inflation and advocate principal component analysis as a more sophisticated weighting mechanism for the constituent components. Indicators constructed using a Divisia index measure of money were found to be more closely related to the inflation reference cycle than indicators using their Simple Sum counterparts when a principal components weighting mechanism was used.

Suggested Citation

  • J. M. Binner & A. Fielding & A. W. Mullineux, 1999. "Divisia money in a composite leading indicator of inflation," Applied Economics, Taylor & Francis Journals, vol. 31(8), pages 1021-1031.
  • Handle: RePEc:taf:applec:v:31:y:1999:i:8:p:1021-1031
    DOI: 10.1080/000368499323733
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    References listed on IDEAS

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    1. Victor Zarnowitz, 1992. "Business Cycles: Theory, History, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number zarn92-1, January.
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    3. Belongia, Michael T, 1996. "Measurement Matters: Recent Results from Monetary Economics Reexamined," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1065-1083, October.
    4. James H. Stock & Mark W. Watson, 1993. "A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience," NBER Chapters, in: Business Cycles, Indicators, and Forecasting, pages 95-156, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Zivile Zekaite & Gabe de Bondt & Elke Hahn, 2017. "Alice: A New Inflation Monitoring Tool," EcoMod2017 10414, EcoMod.
    2. Chris Birchenhall & Denise Osborn & Marianne Sensier, 2001. "Predicting UK Business Cycle Regimes," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 179-195, May.
    3. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 79, European Central Bank.
    4. Elger Thomas & Binner Jane M., 2004. "The UK Household Sector Demand for Risky Money," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-22, March.
    5. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.
    6. Binner, J.M. & Tino, P. & Tepper, J. & Anderson, R. & Jones, B. & Kendall, G., 2010. "Does money matter in inflation forecasting?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4793-4808.
    7. J. M. Binner & R. K. Bissoondeeal & A. W. Mullineux, 2005. "A composite leading indicator of the inflation cycle for the Euro area," Applied Economics, Taylor & Francis Journals, vol. 37(11), pages 1257-1266.
    8. Alicia Gazely & Jane Binner & Graham Kendall, 2004. "Co-evolution vs. Neural Networks; An Evaluation of UK Risky Money," Computing in Economics and Finance 2004 258, Society for Computational Economics.
    9. Livio Stracca, 2004. "Does Liquidity Matter? Properties of a Divisia Monetary Aggregate in the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(3), pages 309-331, July.

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