Money as an Indicator
The leading indicator properties of various of the money and credit aggregates over real activity and inflation is assessed, using Granger-causality tests and impulse response functions. The approach is explicitly disaggregated, looking at sectoral measures of money and credit and various disaggregations of activity - in line with the results of earlier Bank research. Strong and significant effects from narrow money through to nominal GDP and, in particular, prices are found. Broader measures of money/credit - M4, M4 lending to Divisia - do much less well at an aggregate level. But sectoral disaggregation helps matters: for example, corporate M4 and Divisia appear to have a reliable mapping with investment and production and some measures of prices. However, none of the monetary aggregates offer sufficiently robust early warning signals to justify intermediate target status. Rather the message is that, when used alongside other information variables such as the Banks inflation projection, some of the monetary aggregates offer useful corroborative information about incipient activity and price developments.
|Date of creation:||May 1995|
|Date of revision:|
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- Joanna Paisley & Chris Salmon, 1995. "How Cyclical is the PSBR?," Bank of England working papers 34, Bank of England.
- Danny Quah & Shaun Vahey, 1995.
"Measuring Core Inflation,"
Bank of England working papers
31, Bank of England.
- Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
- Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306.
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