Hostname: page-component-788cddb947-jbjwg Total loading time: 0 Render date: 2024-10-09T23:16:15.344Z Has data issue: false hasContentIssue false

REDUNDANCY OR MISMEASUREMENT? A REAPPRAISAL OF MONEY

Published online by Cambridge University Press:  13 June 2013

Joshua R. Hendrickson*
Affiliation:
University of Mississippi
*
Address correspondence to: Joshua R. Hendrickson, Department of Economics, University of Mississippi, 229 North Hall, University, MS 38677, USA; e-mail: jrhendr1@olemiss.edu.

Abstract

The emerging consensus in monetary policy and business cycle analysis is that money aggregates are not useful as an intermediate target for monetary policy or as an information variable. The uselessness of money as an intermediate target is driven, at least in part, by empirical research that suggests that money demand is unstable. In addition, the informational quality of money has been called into question by empirical research that fails to identify a relationship between money growth and inflation, nominal income growth, and the output gap. Nevertheless, this research is potentially flawed by the use of simple sum money aggregates, which are not consistent with economic, aggregation, or index number theory. This paper therefore reexamines previous empirical evidence on money demand and the role of money as an information variable, using Divisia monetary aggregates. These aggregates have the advantage of being derived from microtheoretic foundations, as well as being consistent with aggregation and index number theory. The results of the reevaluation suggest that previous empirical work might be driven by mismeasurement.

Type
Articles
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Barnett, William A. (1980) Economic monetary aggregates: An application of index number and aggregation theory. Journal of Econometrics 14, 1148.CrossRefGoogle Scholar
Barnett, William A. (1984) Recent monetary policy and the divisia monetary aggregates. American Statistician 38, 165172.Google Scholar
Barnett, William A. (1997) Which road leads to stable money demand? Economic Journal 107, 11711185.Google Scholar
Barnett, William A., Fisher, Douglas, and Serletis, Apostolos (1992) Consumer theory and the demand for money. Journal of Economic Literature 30, 20862119.Google Scholar
Barnett, William A., Liu, Jia, Mattson, Ryan S., and van den Noort, Jeff (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24 (1), 101124.Google Scholar
Belongia, Michael T. (1996) Measurement matters: Recent results from monetary economics revisited. Journal of Political Economy 104 (5), 10651083.CrossRefGoogle Scholar
Belongia, Michael T. and Binner, Jane M. (2000) Divisia Monetary Aggregates. New York: Palgrave.CrossRefGoogle Scholar
Carlson, John B., Hoffman, Dennis L., Keen, Benjamin D., and Rasche, Robert H. (2000) Results of a study of the stability of cointegrating relations comprised of broad money aggregates. Journal of Monetary Economics 46, 345383.CrossRefGoogle Scholar
Estrella, Arturo and Mishkin, Frederic S. (1997) Is there a role for monetary aggregates in the conduct of monetary policy? Journal of Monetary Economics 40, 279304.Google Scholar
Fisher, Irving (1922) The Making of Index Numbers: A Study of Their Varieties, Tests, and Reliability. Boston: Houghton Mifflin.Google Scholar
Friedman, Benjamin M. and Kuttner, Kenneth N. (1992) Money, income, prices, and interest rates. American Economic Review 82 (3), 472492.Google Scholar
Friedman, Milton and Schwartz, Anna J. (1970) Monetary Statistics of the United States. Chicago: NBER.Google Scholar
Gali, Jordi (2008) Monetary Policy, Inflation, and the Business Cycle. Princeton, NJ: Princeton University Press.Google Scholar
Hannan, Edward J. and Quinn, Barry G. (1979) The determination of the order of an autoregression. Journal of the Royal Statistical Society 41 (2), 190195.Google Scholar
Hansen, Henrik and Johansen, Soren (1999) Some tests for parameter constancy in cointegrated VAR models. Econometrics Journal 2, 306333.CrossRefGoogle Scholar
Hoffman, Dennis L., Rasche, Robert H., and Tieslau, Margie A. (1995) The stability of long-run monetary demand in five industrial countries. Journal of Monetary Economics 35, 317339.CrossRefGoogle Scholar
Johansen, Soren (2002) A small sample correct for the test of cointegrating rank in the vector autoregressive model. Econometrica 70 (5), 19291961.Google Scholar
Juselius, Katerina (2006) The Cointegrated VAR Model: Methodology and Applications. Oxford, UK: Oxford University Press.Google Scholar
McCallum, Bennett T. (1993) Unit roots in macroeconomic time series: Some critical issues. Federal Reserve Bank of Richmond Quarterly 79 (2), 1343.Google Scholar
McCallum, Bennett T. (2001) Monetary Analysis in Models without Money. Federal Reserve Bank of St. Louis Review July/August, 145–160.CrossRefGoogle Scholar
Poole, William (1988) Monetary policy lessons of recent inflation and deflation. Journal of Economic Perspectives 2, 5172.Google Scholar
Rossana, Robert J. (2009) Normalization in cointegrated time series systems. Canadian Journal of Economics 42 (4), 15471560.Google Scholar
Rudebusch, Glenn D. and Svensson, Lars E. O. (2002) Eurosystem monetary targeting: Lessons from U.S. data. European Economic Review 46, 417442.Google Scholar
Serletis, Apostolos (2001) The Demand for Money. Boston: Kluwer Academic Publishers.CrossRefGoogle Scholar
Serletis, Apostolos and Rahman, Sajjadur (in press) The case for Divisia monetary targeting. Macroeconomic Dynamics.Google Scholar
Serletis, Apostolos and Shahmoradi, Akbar (2006) Velocity and the variability of money growth: Evidence from a VARMA, GARCH-M model. Macroeconomic Dynamics 10, 652666.CrossRefGoogle Scholar
Serletis, Apostolos and Asghar Shahmoradi (2005) Semi-nonparametric estimates of the demand for money in the United States. Macroeconomic Dynamics 9, 542559.Google Scholar
Serletis, Apostolos and Shahmoradi, Asghar (2007) Flexible functional forms, curvature conditions, and the demand for assets. Macroeconomic Dynamics 11, 455486.Google Scholar
Woodford, Michael (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar