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Aggregating Money Demand in Europe with a Divisia Index

  • Wesche, Katrin

Proponents of an aggregation theoretic approach to money demand argue that simple-sum measures do not capture the theoretical notion of money. This is especially true for broad monetary aggregates, which include components held for savings motives that are only imperfect substitutes for transactions media. Simple-sum monetary aggregates thus are not consistent with microeconomic theory. Monetary aggregation in Europe using indices for monetary services seems attractive because these indices can account for the imperfect substitutability between different currencies. In this paper the aggregation theoretic framework is applied to money holdings of European residents and the resulting index is compared to simple-sum M3.

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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 392.

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Length: pages
Date of creation: Nov 1996
Date of revision:
Handle: RePEc:bon:bonsfb:392
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de

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  1. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  2. Paul R. Masson & Marcel Cassard & Timothy D. Lane, 1994. "ERM Money Supplies and the Transition to EMU," IMF Working Papers 94/1, International Monetary Fund.
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  4. Mahmood Pradhan & Huw Pill, 1994. "Monetary Aggregation; A Reconciliation of Theory and Central Bank Practice," IMF Working Papers 94/118, International Monetary Fund.
  5. Jerome L. Stein, 1994. "Can the central bank achieve price stability?," Proceedings, Federal Reserve Bank of St. Louis, issue Mar, pages 175-203.
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  7. Jeroen J. M. Kremers & Timothy D. Lane, 1990. "Economic and Monetary Integration and the Aggregate Demand for Money in the EMS," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 777-805, December.
  8. Daniel L. Thornton & Piyu Yue, 1992. "An extended series of divisia monetary aggregates," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 35-52.
  9. William A. Barnett, 1996. "Which Road Leads to Stable Money Demand?," Macroeconomics 9611001, EconWPA.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  11. William Barnett & Barry E. Jones & Travis D. Nesmith, 2008. "Divisia Second Moments: An Application of Stochastic Index Number Theory," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200803, University of Kansas, Department of Economics, revised Jul 2008.
  12. Richard G. Anderson & Barry Jones & Travis Nesmith, 1996. "Building new monetary services indices: methodology and source data," Working Papers 1996-008, Federal Reserve Bank of St. Louis.
  13. Barnett, William A. & Serletis, Apostolos, 1990. "A dispersion-dependency diagnostic test for aggregation error : With applications to monetary economics and income distribution," Journal of Econometrics, Elsevier, vol. 43(1-2), pages 5-34.
  14. 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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