Hostname: page-component-848d4c4894-x5gtn Total loading time: 0 Render date: 2024-05-02T17:08:13.367Z Has data issue: false hasContentIssue false
  • English
  • Français

UK household-sector money demand and Divisia monetary aggregates in the new millennium

Published online by Cambridge University Press:  17 March 2023

Adrian R. Fleissig  and
Barry E. Jones
Adrian R. Fleissig
Affiliation:
Department of Economics, California State University at Fullerton, Fullerton, CA, USA
Barry E. Jones*
Affiliation:
Department of Economics, Binghamton University, Binghamton, NY, USA
*
*Corresponding author. Email: bjones@binghamton.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

We estimate elasticities of substitution between components of the Bank of England’s household-sector UK Divisia monetary aggregate using quarterly data from 1999 to 2019, encompassing the period surrounding the global financial crisis. The demand system includes interest-bearing sight and time deposits at monetary financial institutions as components, since deposit data for banks (excluding mutuals) and for mutuals are no longer published separately. We find that the elasticities of substitution that relate to changes in the user cost of noninterest-bearing monetary assets imply inelastic substitution over all or almost all of the sample and, consequently, a conventional monetary aggregate would be a highly misleading economic indicator relative to a Divisia monetary aggregate.

Keywords

Money DemandDivisia AggregatesMorishima Elasticity of SubstitutionFourier Flexible Functional Form
Type
Notes
Information
Macroeconomic Dynamics , Volume 28 , Issue 1 , January 2024 , pp. 51 - 73
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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

Anderson, R., Duca, J., Fleissig, A. and Jones, B.. (2019) New monetary services (Divisia) indexes for the post-war U.S. Journal of Financial Stability 42, 3–17.CrossRefGoogle Scholar
Anderson, R. and Jones, B.. (2011) A comprehensive revision of the U.S. monetary services (Divisia) indexes. Federal Reserve Bank of St. Louis Review 93(5), 325–359.Google Scholar
Bailey, J. (2014) Changes to publication of data for mutually owned monetary financial institutions. Statistics Article, Bank of England, 3 January.Google Scholar
Barnett, W. (1978) The user cost of money. Economic Letters 1(2), 145–149.CrossRefGoogle Scholar
Barnett, W. (1980) Economic monetary aggregates: An application of index numbers and aggregation theory. Journal of Econometrics 14(1), 11–48.CrossRefGoogle Scholar
Barnett, W. (1982) The optimal level of monetary aggregation. Journal of Money, Credit, and Banking 14(4), 687–710.CrossRefGoogle Scholar
Barnett, W., Fisher, D. and Serletis, A.. (1992) Consumer theory and the demand for money. Journal of Economic Literature 30, 2086–2119.Google Scholar
Barnett, W. and Jonas, A.. (1983) The Müntz-Szatz demand system: An application of a globally well behaved series expansion. Economics Letters 11(4), 337–342.CrossRefGoogle Scholar
Barnett, W. and Yue, P.. (1988) Seminonparametric estimation of the asymptotically ideal model: The AIM demand system. In: G. Rhodes and T. Fomby (eds.), Nonparametric and Robust Inference, Advances in Econometrics, vol. 7, pp. 229–251.Google Scholar
Barnett, W. A. and Gaekwad, N. B.. (2018) The demand for money for EMU: A flexible functional form approach. Open Economies Review 29(2), 353–371.CrossRefGoogle Scholar
Barr, D. and Cuthbertson, K.. (1991) Neoclassical consumer demand theory and the demand for money. The Economic Journal 101(407), 855–876.CrossRefGoogle Scholar
Belongia, M. (1996) Measurement matters: Recent results from monetary economics reexamined. Journal of Political Economy 104(5), 1065–1083.CrossRefGoogle Scholar
Belongia, M. and Chrystal, A.. (1991) An admissible monetary aggregate for the United Kingdom. The Review of Economics and Statistics 73(3), 497–503.CrossRefGoogle Scholar
Belongia, M. and Ireland, P.. (2021) Strengthening the second pillar: A greater role for money in the ECB’s strategy. Applied Economics 54(1), 99–114.CrossRefGoogle Scholar
Berar, R. (2013) Improvements to Divisia money series. Statistics Article, Bank of England, 30 August.Google Scholar
Berar, R. and Olwadi, J.. (2013) Adjustments to Divisia money series. Monetary and Financial Statistics, Bank of England, January.Google Scholar
Berndt, E. and Savin, N.. (1975) Estimation and hypothesis testing in singular equation systems with autoregressive disturbances. Econometrica 43(5/6), 937–957.CrossRefGoogle Scholar
Binner, J., Bissoondeeal, R., Elger, T., Jones, B. and Mullineux, A. (2009) Admissible monetary aggregates for the euro area. Journal of International Money and Finance 28, 99–114.CrossRefGoogle Scholar
Binner, J., Chaudhry, M., Logan, K. and Swofford, J.. (2018) Risky monetary aggregates for the UK and US. Journal of International Money and Finance 89, 127–138.CrossRefGoogle Scholar
Bissoondeeal, R., Jones, B., Binner, J. and Mullineux, A.. (2010) Household-sector money demand for the UK. The Manchester School 78, 90–113.CrossRefGoogle Scholar
Bissoondeeal, R., Karogloua, M. and Binner, J.. (2019) Structural changes and the role of monetary aggregates in the UK. Journal of Financial Stability 42, 100–107.CrossRefGoogle Scholar
Blackorby, C. and Russell, R.. (1989) Will the real elasticity of substitution please stand up? (A comparison of Allen/Uzawa and Morishima elasticities). American Economic Review 79(4), 882–888.Google Scholar
Brill, M. C., Nautz, D. and Sieckmann, L.. (2021) Divisia monetary aggregates for a heterogeneous euro area. Empirica 48(1), 247–278.CrossRefGoogle Scholar
Chang, D. and Serletis, A.. (2019) The demand for liquid assets: Evidence from the Minflex laurent demand system with conditionally heteroscedastic errors. Macroeconomic Dynamics 23(7), 2941–2958.CrossRefGoogle Scholar
Davis, G. and Gauger, J.. (1996) Measuring substitution in monetary-asset demand systems. Journal of Business and Economic Statistics 14(2), 203–208.CrossRefGoogle Scholar
Donovan, D. (1978) Modeling the demand for liquid asses: An application to Canada. IMF Staff Papers 25(4), 676–704.CrossRefGoogle Scholar
Drake, L. (1992) The substitutability of financial assets in the UK: Implications for monetary aggregation. Manchester School 60(3), 221–248.CrossRefGoogle Scholar
Drake, L. (1996) Relative prices in the UK personal sector money demand function. The Economic Journal 106(438), 1209–1226.CrossRefGoogle Scholar
Drake, L. (1997) Nonparametric demand analysis of UK personal sector decisions on consumption, leisure and monetary assets: A reappraisal. Review of Economic Statistics 79(4), 679–683.CrossRefGoogle Scholar
Drake, L. and Chrystal, A.. (1997) Personal sector money demand in the UK. Oxford Economic Papers 49(2), 188–206.CrossRefGoogle Scholar
Drake, L. and Fleissig, A.. (2004) Semi-nonparametric estimates of currency substitution: The demand for sterling in Europe. Review of International Economics 12(3), 374–394.CrossRefGoogle Scholar
Drake, L. and Fleissig, A.. (2006) Adjusted monetary aggregates and UK inflation targeting. Oxford Economic Papers 58(4), 681–705.CrossRefGoogle Scholar
Drake, L. and Fleissig, A.. (2008) A note on the policy implications of using Divisia consumption and monetary aggregates. Macroeconomic Dynamics 12(1), 132–149.CrossRefGoogle Scholar
Drake, L. and Fleissig, A.. (2009) Potential biases in substitution estimates and violations of regularity conditions. Advances in Econometrics 24, 27–60.CrossRefGoogle Scholar
Drake, L. and Fleissig, A.. (2010) Substitution between monetary assets and consumption goods: New evidence on the monetary transmission mechanism. Journal of Banking and Finance 34(11), 2811–2821.CrossRefGoogle Scholar
Drake, L., Fleissig, A. and Mullineux, A.. (1999) Are ‘Risky Assets’ substitutes for ‘Monetary Assets’? Economic Inquiry 37(3), 510–526.CrossRefGoogle Scholar
Drake, L., Fleissig, A. and Swofford, J.. (2003) A semi-nonparametric approach to neoclassical consumer theory and the demand for UK monetary assets. Economica 70(277), 99–120.CrossRefGoogle Scholar
Eastwood, B. J. (1991) Asymptotic normality and consistency of semi-nonparametric regression estimators using an upwards F test truncation rule. Journal of Econometrics 48(1-2), 151–181.CrossRefGoogle Scholar
El Badawi, I., Gallant, A. and Souza, G.. (1983) An elasticity can be estimated consistently without a priori knowledge of functional form. Econometrica 51(6), 1731–1751.CrossRefGoogle Scholar
El-Shagi, M. and Kelly, L.. (2019) What can we learn from country-level liquidity in the EMU? Journal of Financial Stability 42, 75–83.CrossRefGoogle Scholar
Elger, T., Jones, B., Edgerton, D. and Binner, J.. (2008) A note on the optimal level of monetary aggregation in the United Kingdom. Macroeconomic Dynamics 12(1), 117–131.CrossRefGoogle Scholar
Fisher, D., Fleissig, A. and Serletis, A.. (2001) An empirical comparison of flexible demand system functional forms. Journal of Applied Econometrics 16(1), 59–80.CrossRefGoogle Scholar
Fisher, D. and Fleissig, A. R. (1997) Monetary aggregation and the demand for assets. Journal of Money, Credit, and Banking 29(4), 458–475.CrossRefGoogle Scholar
Fleissig, A. and Jones, B.. (2015) The impact of commercial sweeping on the demand for monetary assets during the great recession. Journal of Macroeconomics 45, 412–422.CrossRefGoogle Scholar
Fleissig, A. and Swofford, J.. (2020) The demand for assets through a low interest rate environment. Applied Economics 52(60), 6540–6551.CrossRefGoogle Scholar
Gallant, A. (1981) On the bias in flexible functional forms and an essentially unbiased form: The Fourier flexible form. Journal of Econometrics 15(2), 211–245.CrossRefGoogle Scholar
Gallant, A. and Golub, G.. (1984) Imposing curvature restrictions on flexible functional forms. Journal of Econometrics 26(3), 295–321.CrossRefGoogle Scholar
Ghosh, T. and Bhaduri, S.. (2018) Money’s causal role in exchange rate: Do Divisia monetary aggregates explain more? International Review of Economics and Finance 57, 402–417.CrossRefGoogle Scholar
Ghosh, T. and Parab, M.. (2019) Testing the Friedman-Schwartz hypothesis using time-varying correlation analysis. Applied Economics Letters 26(20), 1694–1699.CrossRefGoogle Scholar
Hancock, M. (2005) Divisia money. Bank of England Quarterly Bulletin Spring, 39–46.Google Scholar
Jadidzadeh, A. and Serletis, A.. (2019) The demand for assets and optimal monetary aggregation. Journal of Money, Credit, and Banking 51(4), 929–952.CrossRefGoogle Scholar
Jin, M. (2016) Measuring substitution in China’s monetary-assets demand system. China Economic Review 50, 117–132.CrossRefGoogle Scholar
Jones, B., Fleissig, A., Elger, T. and Dutkowsky, D.. (2008) Monetary policy and monetary asset substitution. Economic Letters 99(1), 18–22.CrossRefGoogle Scholar
Jones, B. and Stracca, L.. (2008) Does money matter in the IS curve: The case of the UK. Manchester School 76(S1), 58–84.CrossRefGoogle Scholar
Keating, J., Kelley, L. and Valcarcel, V.. (2014) Solving the price puzzle with an alternative indicator of monetary policy. Economics Letters 124(2), 188–194.CrossRefGoogle Scholar
Rayton, B. and Pavlyk, K.. (2010) On the recent divergence between measures of the money supply in the UK. Economics Letters 108(2), 159–162.CrossRefGoogle Scholar
Serletis, A. and Shahmoradi, A.. (2005) Semi-nonparametric estimates of the demand for money in the United States. Macroeconomic Dynamics 9(4), 542–559.CrossRefGoogle Scholar
Serletis, A. and Shahmoradi, A.. (2007) Flexible functional forms, curvature conditions, and the demand for assets. Macroeconomic Dynamics 11(4), 455–486.CrossRefGoogle Scholar
Serletis, A. and Xu, L.. (2020) Functional monetary aggregates, monetary policy, and business cycles. Journal of Economic Dynamics and Control 121, 1039–1094.CrossRefGoogle Scholar
Stracca, L. (2004) Does liquidity matter? Properties of a Divisia monetary aggregate in the Euro area. Oxford Bulletin of Economics and Statistics 66(3), 309–331.CrossRefGoogle Scholar
Xu, L. and Serletis, A.. (2022) The demand for assets: Evidence from the Markov switching normalized quadratic model. Journal of Money, Credit and Banking 54(4), 989–1025.CrossRefGoogle Scholar
Yue, P. (1991) A microeconometric approach to estimating money demand: The asymptotically ideal model. Federal Reserve Bank of St. Louis Review 73(6), 36–51.Google Scholar