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An Empirical Analysis of M4 in the United Kingdom

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  • Paul Fisher
  • Juna Vega

Abstract

This paper presents some econometric modelling of M4 balances. It extends earlier Bank research on M4 by looking separately at personal and corporate holdings of money, and applies some recent advances in econometric methodology. The results confirm the importance of sectoral analysis. The results are especially encouraging for the personal sector where a significant role is found for wealth, interest rates and inflation. More surprising is the finding that simultaneous estimation of money demand and a consumption function improves both specification - the dynamic interaction of money and consumption may have an important role to play in explaining the recent behaviour of both variables. Corporate sector analysis is more problematic. The analysis and empirical results both suggest that interest rates must be explained simultaneously with corporate sector M4 balances. But no stable model of interest rates is found. Nevertheless a relatively simple model can be estimated for corporate sector M4. The results suggest that the effects of financial liberalisation can be captured by a combination of wealth and interest rate differentials. To the extent that wealth/income ratios become more stable, M4 velocity may also stabilise in the future.

Suggested Citation

  • Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
    • Handle: RePEc:boe:boeewp:21
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1993/wp21.pdf
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    References listed on IDEAS

    as
    1. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(4), pages 371-387, December.
    2. Bardsen, G. & Fisher, P.G., 1993. "The Importance of Being Structured," Papers 02-93, Norwegian School of Economics and Business Administration-.
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    Cited by:

    1. Mark S Astley & Andrew G Haldane, 1995. "Money as an Indicator," Bank of England working papers 35, Bank of England.
    2. Anthony Yates & Bryan Chapple, 1996. "What Determines the Short-run Output-Inflation Trade-off?," Bank of England working papers 53, Bank of England.
    3. repec:dgr:rugcds:199909 is not listed on IDEAS
    4. Prasanna Gai, 1996. "International Bank Lending to LDCs - an Information-Based Approach," Bank of England working papers 43, Bank of England.
    5. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2007. "The sectoral distribution of money supply in the Euro area," Temi di discussione (Economic working papers) 627, Bank of Italy, Economic Research and International Relations Area.
    6. Calza, Alessandro & Sousa, João, 2003. "Why has broad money demand been more stable in the euro area than in other economies? A literature review," Working Paper Series 261, European Central Bank.
    7. David Barr & Bahram Pesaran, 1995. "An assessment of the relative importance of real interest rates, inflation and term premia in determining the prices of real and nominal UK bonds," Bank of England working papers 32, Bank of England.
    8. Browne, F.X. & Fagan, G. & Henry, J., 1997. "Money Demand in EU Countries : A Survey," Papers 7, European Monetary Institute.
    9. Barlow, David, 2023. "The stability of UK households Divisia money balances," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 451-459.
    10. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
    11. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
    12. Gerdesmeier, Dieter, 1996. "Die Rolle des Vermögens in der Geldnachfrage," Discussion Paper Series 1: Economic Studies 1996,05, Deutsche Bundesbank.
    13. Scott Hendry, 1995. "Long-Run Demand for M1," Macroeconomics 9511001, University Library of Munich, Germany.
    14. Elmer Sterken, 2004. "Demand for money and shortages in Ethiopia," Applied Economics Letters, Taylor & Francis Journals, vol. 11(12), pages 759-769.
    15. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2011. "Assessing excess liquidity in the euro area: the role of sectoral distribution of money," Applied Economics, Taylor & Francis Journals, vol. 43(23), pages 3213-3230.
    16. Ian Bond & Gareth Murphy & Gary Robinson, 1994. "Potential credit exposure on interest rate swaps," Bank of England working papers 25, Bank of England.
    17. Mark Deacon & Andrew Derry, 1994. "Estimating the Term Structure of Interest Rates," Bank of England working papers 24, Bank of England.
    18. Gerdesmeier, Dieter, 1996. "The role of wealth in money demand," Discussion Paper Series 1: Economic Studies 1996,05e, Deutsche Bundesbank.
    19. Bridges, Jonathan & Thomas, Ryland, 2012. "The impact of QE on the UK economy – some supportive monetarist arithmetic," Bank of England working papers 442, Bank of England.
    20. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
    21. Mohammad Hasan, 1998. "The choice of appropriate monetary aggregates in the United Kingdom," Applied Economics Letters, Taylor & Francis Journals, vol. 5(9), pages 563-568.

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