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

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  • Stracca, Livio

Abstract

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

Suggested Citation

  • Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20010079
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    References listed on IDEAS

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    Cited by:

    1. Ryadh M. Alkhareif & William Barnett, 2012. "Divisia Monetary Aggregates for the GCC Countries," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201209, University of Kansas, Department of Economics, revised Aug 2012.
    2. J. M. Binner & R. K. Bissoondeeal & A. W. Mullineux, 2005. "A composite leading indicator of the inflation cycle for the Euro area," Applied Economics, Taylor & Francis Journals, vol. 37(11), pages 1257-1266.
    3. Barnett, William A., 2003. "Aggregation-theoretic monetary aggregation over the euro area, when countries are heterogeneous," Working Paper Series 260, European Central Bank.
    4. Jane Binner & Rakesh Bissoondeeal & Thomas Elger & Alicia Gazely & Andrew Mullineux, 2005. "A comparison of linear forecasting models and neural networks: an application to Euro inflation and Euro Divisia," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 665-680.
    5. William A. Barnett, 2011. "Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries," World Scientific Book Chapters,in: Financial Aggregation And Index Number Theory, chapter 6, pages 167-206 World Scientific Publishing Co. Pte. Ltd..
    6. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank.
    7. Elger, Thomas & Jones, Barry E. & Nilsson, Birger, 2006. "Forecasting with Monetary Aggregates: Recent Evidence for the United States," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 428-446.
    8. Hans-Eggert Reimers, 2003. "Does Money Include Information for Output in the Euro Area?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 231-252, June.
    9. Binner, Jane M. & Bissoondeeal, Rakesh K. & Elger, C. Thomas & Jones, Barry E. & Mullineux, Andrew W., 2009. "Admissible monetary aggregates for the euro area," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 99-114, February.
    10. Brand, Claus & Reimers, Hans-Eggert & Seitz, Franz, 2003. "Forecasting real GDP: what role for narrow money?," Working Paper Series 254, European Central Bank.
    11. Reimers Hans-Eggert, 2003. "Does Money Include Information for Prices in the Euro Area? / Enthält Geld Informationen für die Preisentwicklung im Eurowährungsgebiet?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 223(5), pages 581-602, October.
    12. Sarwar, haroon & Hussian, zakir & Awan, masood sarwar, 2011. "Money Demand Functions for Pakistan (Divisia Approach)," MPRA Paper 34361, University Library of Munich, Germany.

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    Keywords

    Divisia monetary aggregates; EMU; liquidity; Money demand;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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