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Does money matter in the euro area? Evidence from a new Divisia index

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  • Zsolt Darvas

    () (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and and Bruegel and Corvinus University of Budapest)

Abstract

Standard simple-sum monetary aggregates, like M3, sum up monetary assets that are imperfect substitutes and provide different transaction and investment services. Divisia monetary aggregates, originated from Barnett (1980), are derived from economic aggregation and index number theory and aim to aggregate the money components by considering their transaction service. No Divisia monetary aggregates are published for the euro area, in contrast to the United Kingdom and United States. We derive and make available a dataset on euro-area Divisia money aggregates for January 2001 – September 2014 using monthly data. We plan to update the dataset in the future. Using structural vector-autoregressions (SVAR), we find that Divisia aggregates have a significant impact on output about 1.5 years after a shock and tend also to have an impact on prices and interest rates. The latter result suggests that the European Central Bank reacted to developments in monetary aggregates. Divisia aggregates reacted negatively to unexpected increases in the interest rates. None of these results are significant when we use simple-sum measures of money. Our findings for the euro area complement the evidence from US data that Divisia monetary aggregates are useful in assessing the impacts of monetary policy and that they work better in SVAR models than simple-sum measures of money.

Suggested Citation

  • Zsolt Darvas, 2014. "Does money matter in the euro area? Evidence from a new Divisia index," IEHAS Discussion Papers 1433, Institute of Economics, Centre for Economic and Regional Studies.
  • Handle: RePEc:has:discpr:1433
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    References listed on IDEAS

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    1. 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..
    2. 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.
    3. Michael T. Belongia & Peter N. Ireland, 2015. "Interest Rates and Money in the Measurement of Monetary Policy," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(2), pages 255-269, April.
    4. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank.
    5. 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.
    6. Keating, John W. & Kelly, Logan J. & Valcarcel, Victor J., 2014. "Solving the price puzzle with an alternative indicator of monetary policy," Economics Letters, Elsevier, vol. 124(2), pages 188-194.
    7. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
    8. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    9. Makram El-shagi & Logan J Kelly, 2014. "Liquidity in the liquidity crisis: evidence from Divisia monetary aggregates in Germany and the European crisis countries," Economics Bulletin, AccessEcon, vol. 34(1), pages 63-72.
    10. Livio Stracca, 2004. "Does Liquidity Matter? Properties of a Divisia Monetary Aggregate in the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(3), pages 309-331, July.
    11. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
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    Cited by:

    1. Ghosh, Taniya & Bhadury, Soumya, 2018. "Money's causal role in exchange rate: Do divisia monetary aggregates explain more?," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 402-417.
    2. repec:kap:openec:v:29:y:2018:i:2:d:10.1007_s11079-017-9453-0 is not listed on IDEAS
    3. Ghosh, Taniya & Parab, Prashant Mehul, 2018. "Testing the Friedman and Schwartz Hypothesis using Time Varying Correlation Analysis," MPRA Paper 90628, University Library of Munich, Germany.
    4. Taniya Ghosh & Prashant Mehul Parab, 2019. "Testing the Friedman-Schwartz Hypothesis Using Time Varying Correlation," Working Papers id:12986, eSocialSciences.
    5. William A. Barnett & Neepa B. Gaekwad, 2018. "The Demand for Money for EMU: a Flexible Functional Form Approach," Open Economies Review, Springer, vol. 29(2), pages 353-371, April.
    6. Brill, Maximilian & Nautz, Dieter & Sieckmann, Lea, 2019. "Divisia monetary aggregates for a heterogeneous euro area," Discussion Papers 2019/9, Free University Berlin, School of Business & Economics.

    More about this item

    Keywords

    Divisia index; Financial crisis; Monetary aggregation; Monetary policy; Structural VAR;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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