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Does money matter in the IS curve? The case of the UK

  • Jones, Barry E.
  • Stracca, Livio

Narrow and broad money measures (including Divisia aggregates) have been found to have explanatory power for UK output in backward-looking specifications of the IS curve. In this paper, we explore whether or not real balances enter into a forward-looking IS curve for the UK, building on the theoretical framework of Ireland (2004). To do this, we test for additive separability between consumption and money over a sizeable part of the post-ERM period using non-parametric methods. If consumption and money are not additively separable, then real money balances enter into the forward-looking IS curve (the converse does not hold, however). A main finding is that the UK data seem to be broadly consistent with additive separability for the the more recent period from 1999 to 2007. JEL Classification: C14, C43, C63, E21, E41

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Paper provided by European Central Bank in its series Working Paper Series with number 0904.

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Date of creation: Jun 2008
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Handle: RePEc:ecb:ecbwps:20080904
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