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Divisia money in a composite leading indicator of inflation


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


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

    1. Per Andersen & Niels Christian Petersen, 1993. "A Procedure for Ranking Efficient Units in Data Envelopment Analysis," Management Science, INFORMS, vol. 39(10), pages 1261-1264, October.
    2. Borden, James P., 1988. "An assessment of the impact of diagnosis-related group (DRG)-based reimbursement on the technical efficiency of New Jersey hospitals using data envelopment analysis," Journal of Accounting and Public Policy, Elsevier, vol. 7(2), pages 77-96.
    3. Blomqvist, Ake, 1991. "The doctor as double agent: Information asymmetry, health insurance, and medical care," Journal of Health Economics, Elsevier, vol. 10(4), pages 411-432.
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Birchenhall, Chris R & Osborn, Denise R & Sensier, Marianne, 2001. "Predicting UK Business Cycle Regimes," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 179-195, May.
    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.

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