Simple-sum versus Divisia Money in Switzerland: Some Empirical Results

This paper is divided into four parts. Section 5.2 describes the Swiss National Bank’s (SNB) internally used monetary indicator and reporting system, of which the Divisia aggregates are part. Through financial innovations and the increasing importance of non-cash payments, the SNB is currently revising the definitions of its simple-sum as well as of its Divisia monetary aggregates. We sketch the main aspects of the revision in Section 5.3. In Section 5.4, we present different empirical tests, evaluating the relative performance of the present and newly defined aggregates. To determine the short-run predictive information content of money, traditional Granger-causality tests within low dimension vector auto-regressive (VAR) systems in terms of first differenced variables are carried out. Vector error correction models (VECMs) are also used, to shed light on the relative importance of different monetary aggregates, when possible long-run relationships between money, prices, interest rates and output are explicitly taken into account. Tests of additional predictive information of lagged money in a structural Keynesian price equation supplement the VAR-Granger tests. As a final exercise, a series of Engle-Granger (1987) cointegration regressions of income velocity on the yield of government bonds are carried out. Section 5.5 concludes. The main findings of the investigations are as follows: for most of the measures studied, money does — as expected — help to predict prices and output in the short run as well as in the long run.