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Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area

  • Stracca, Livio

This paper sets out to build a synthetic quarterly Divisia monetary aggregate for the euro area using area wide data over the sample period from 1980 to 2000. Then, the analysis proceeds in two separate steps. First, the demand for this Divisia monetary aggregate is evaluated using econometric techniques. By means of a cointegrated VECM model, a theoretically plausible and stable demand function may be estimated. Second, the information content of the Divisia monetary aggregate as regards future output and inflation in the euro area is analysed. The outcome of this analysis suggests that the Divisia monetary aggregate has some information content from a forward-looking perspective, of comparable quality as simple sum M1 and M3. More in general, the paper lends further support to the view that money and 'liquidity' should be assigned an important role in shaping monetary policy in the euro area. JEL Classification: E41, E52

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Paper provided by European Central Bank in its series Working Paper Series with number 0079.

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Date of creation: Oct 2001
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Handle: RePEc:ecb:ecbwps:20010079
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  2. Katrin Wesche, 1997. "The demand for divisia money in a core monetary union," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 51-60.
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  8. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy and the business cycle," Working Paper Series, Macroeconomic Issues 92-15, Federal Reserve Bank of Chicago.
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  18. Drake, L. & Mullineux, A., 1995. "One Divisa Money for Europe?," Discussion Papers 95-04, Department of Economics, University of Birmingham.
  19. 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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  21. Serletis, Apostolos & Robb, A Leslie, 1986. "Divisia Aggregation and Substitutability among Monetary Assets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 430-46, November.
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  24. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  25. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
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