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Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions

  • APOSTOLOS SERLETIS
  • PERIKLIS GOGAS

King et al. ([King, Robert G., 1991]) evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar U.S. macroeconomic data. They find a common stochastic trend in a three‐variable system that includes output, consumption, and investment, but the explanatory power of the common trend drops significantly when they add money balances and the nominal interest rate. In this paper, we revisit the cointegration tests in the spirit of King et al., using improved monetary aggregates whose construction has been stimulated by the Barnett critique. We show that previous rejections of the balanced growth hypothesis and classical money demand functions can be attributed to mismeasurement of the monetary aggregates.

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File URL: http://hdl.handle.net/10.1111/jmcb.2014.46.issue-1
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 46 (2014)
Issue (Month): 1 (02)
Pages: 229-241

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Handle: RePEc:wly:jmoncb:v:46:y:2014:i:1:p:229-241
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  2. William Barnett & Jia Liu & Ryan Mattson & Jeff van den Noort, 2012. "The New CFS Divisia Monetary Aggregates: Design, Construction, and Data Sources," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201208, University of Kansas, Department of Economics, revised May 2012.
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  9. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
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  11. Serletis, Apostolos, 1987. "The demand for divisia M1, M2, and M3 in the United States," Journal of Macroeconomics, Elsevier, vol. 9(4), pages 567-591.
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