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.

Using U.K. data that are consistent with utility maximizing behavior by consumers, we construct aggregates for both consumption goods (nondurables and services) and monetary assets that are consistent with economic aggregation theory. Using these aggregates and the stock of durable goods, we estimate the elasticities of substitution between various consumption goods and monetary assets. These estimates are compared to the corresponding results from conventional monetary and consumption aggregates. The results give important information for monetary policy and the monetary transmission mechanism. In particular, these substitution estimates provide insight into the recent changes in expenditure on durable goods. We also show that the use of conventional U.K. consumption and monetary aggregates often give incorrect estimates of substitution and can provide misleading policy insights.

We derive a seminonparametric utility function containing theconstant relative risk aversion (CRRA) function as a special case,and we estimate the associated Euler equations with U.S. consumptiondata. There is strong evidence that the CRRA function ismisspecified. The correctly specified function includes laggedeffects of durable goods and perhaps nondurable goods, is bounded asrequired by Arrow's Utility Boundedness Theorem, and has a positiverate of time preference. Constraining sample periods and separabilitystructure to be consistent with the generalized axiom of revealedpreference affects estimation results substantially. Using Divisiaaggregates instead of the NIPA aggregates also affects results.

We examine whether annual,quarterly, and monthly U.S. aggregateconsumption data could have beengenerated by a utility-maximizingrepresentative agent withintertemporally separable utility. Themodel appears inapplicable over the fulltime periods covered by the NIPA data,which are the sample periods often usedin the literature. The model doesappear applicable, however, over longsubsamples. The data also areinconsistent with separabilityassumptions routinely made in theliterature. In particular, the maincategories of consumption (nondurables,services, and durables) are not mutuallyseparable. We consider the implicationsof our results for inference aboutconsumption based on the representative-agent model.