A Semi-nonparametric Approach to the Demand for UK Monetary Assets

Abstract

We estimate an asymptotically ideal model of the demand for UK personal sector monetary assets. We use data that are consistent with utility-maximizing behaviour, and find that UK monetary assets are generally substitutes in use. The estimated elasticities of substitution during the 1980s and the early 1990s indicate that a relatively broad monetary aggregate should be used in economic studies. The results also suggest that any policy based on interest or user cost elasticities of substitution between financial assets should be based on the Morishima elasticities, as the Allen-Uzawa calculation can give misleading results.Economica (2003) 70, 99-120

A Note on the Policy Implications of Using Divisia Consumption and Monetary Aggregates

“…In a consumer optimization, the agent gains utility from both consumer goods and the service flows from monetary assets, as in Samuelson and Sato (1984), Barnett, Fisher, and Serletis (1992), Fisher and Fleissig (1997), Fleissig and Swofford (1996), Fisher, Fleissig, and Serletis (2001), and Drake, Fleissig, and Swofford (2003). Hence, the utility function consists of vectors of service flows from the 24 variables from the ONS and the Bank of England: U(nondurables, services, durables, monetary assets).…”

“…We follow the nonparametric approach established by Whitney (1987, 1988) to test whether data are consistent with utility maximization. This approach has been applied to U.K. data by Patterson (1991), Drake (1997), Drake, Fleissig, and Swofford (2003) and Elger, Jones, Edgerton, and Binner (2005). 1 After establishing utility maximization for the assets and goods, we follow Barnett (1980Barnett ( , 1982Barnett ( , 1987 and construct Divisia aggregates, which are consistent with economic aggregation theory from the monetary assets, nondurable goods, and services expenditure.…”

A New Empirically Weighted Monetary Aggregate for the United States

“…In particular, the use of a linear model, when the data generating function is nonlinear, could produce a suboptimal aggregate with an unstable relationship to the target variable. Indeed, many monetary asset demand studies explicitly recognize this issue by estimating nonlinear systems, such as the Fourier and asymptotically ideal model (AIM) systems (Drake et al 1999, 2003, Fisher and Fleissig 1994, Fleissig and Swofford 1997. Hence, although this is clearly an important issue, our objective is to use the notion of a longrun cointegrating relationship between the monetary components and nominal income using the PSS approach.…”

Semi-Nonparametric Estimates of the Demand for Money in the United States

“…By global approximation, we mean that the flexible functional form is capable, in the limit, of approximating the unknown underlying generating function at all points and thus of producing arbitrarily accurate elasticities at all data points. Two such seminonparametric functions are the Fourier flexible functional form, introduced by Gallant (1981), and the asymptotically ideal model (AIM), introduced by Barnett and Jonas (1983) and employed and explained by Barnett and Yue (1988); see also Swofford (1996, 1997), Fisher and Fleissig (1997), Fisher, Fleissig, and Serletis (2001), Fleissig and Serletis (2002), and Drake et al (2003) for some interesting applications.…”