Divisia and Simple Sum Monetary Aggregates: Any Empirical Relevance for Turkey?

Abstract

In consideration of channels through which monetary policy affects economic activity, the monetary aggregates have been mostly ignored by the monetary authorities instead of which shortrun interest rates have been given a priori role. These monetary aggregates are largely argued to fail in measuring the effectiveness of different monetary policy regimes in forecasting the macroeconomic fundamentals. Grounded on the "Barnett critique", the formation of traditional simple-sum monetary aggregates assuming for perfect substitution among the components of the money supply is blamed for such a failure of money in explaining the real activity. Given increasing varieties of financial assets which have completely different "moneyness", it is important to provide an alternative measure of the money supply. Hereby, the Divisia monetary aggregates which give different weights to different assets have arisen as an alternative approach. In this study, a Divisia index is constructed to test its predictive power on quantities and prices compared to its simple sum counterpart. Accordingly, a Divisia index is built-up for Turkish economy for the period 2006-2016 to see whether the utilization of the Divisia monetary aggregates in the conduct of monetary policy makes any difference compared to that of traditional simple sum money supply. Under different specifications, though the relative power of the Divisia aggregates in predicting quantity and price variables is found, still, it can be argued that theoretically well-rounded formation of the Divisia index is not that much empirically justified for the case of Turkey.

Constructing Divisia Monetary Aggregates for Nigeria

“…The result revealed the superiority of the Divisia indexes over the simple sum monetary aggregates in monitoring the business cycles of the economies' and indicated direct evidence of higher economic harmonization between the Gulf countries especially in relation to their financial markets and monetary policy. In a similar study by Polat (2018) for the Turkish economy for the period 2006 to 2016 using SVAR, results showed the robustness of Divisia aggregates in predicting quantity and price variables compared to its simple sum counterpart. However, under different specifications, though the relative power of the Divisia aggregates in predicting quantity and price variables was present, it could be argued that theoretically well-rounded formation of the Divisia index was not that much empirically justified for the case of Turkey.…”

“…Given the growing number of financial assets with varying degrees of "moneyness", an alternative measure of money supply is necessary. As a result, the Divisia monetary aggregates, have emerged as a viable alternative as it assigns varying weights to various assets (Polat, 2018).…”

Sustainable Finance for Promoting Inclusive Growth

“…research is also supported byPuah & Hiew (2010),Leong et al (2010),Sianturi (2017),Hendrickson (2013), andPolat (2018), states that the money demand function has an impact on the use of monetary aggregates for division of money.Consumers ' investment decisions and other forms of spending are strongly influenced by the amount of money circulating in the community and interest rates, which then result in changes in aggregate demand to respond to the monetary policy set by the government(Asongu, 2013).According toOdeleye & Anthonia (2020) defines that the money supply is the amount of money and other financial instruments in an economy in a certain period. Several kinds…”

Divisia monetary aggregates for Russia: Money demand, GDP nowcasting and the price puzzle

“…By contrast, weighted averaging enables Divisia monetary aggregates to reflect the substitution effects between monetary assets, which is crucial in the Russian context. 3 However, to the best of our knowledge, Russia is not among the emerging economies, for which a Divisia monetary index has been developed (e.g., China (Barnett and Tang, 2016), India (Barnett, Bhadury and Ghosh, 2016), Indonesia (Sianturi et al, 2017), Turkey (Polat, 2018)).…”