Do Monetary Aggregates Belong in a Monetary Model? Evidence From the Uk

Abstract

Conventional monetary models focus on interest rates and omit monetary aggregatesfrom policy discussions. This paper examines whether augmenting the measure ofmonetary policy with monetary aggregates helps determine more robust links betweenpolicy and economic fluctuations. After constructing the Divisia money index for theUK, I employ structural vector autoregression to identify two different UK monetarypolicy regimes. Inclusion of this (correct) measure of money and disentangling themoney supply from demand resolve the price and liquidity puzzles. The results pointto the informational content embedded in monetary aggregates, suggesting theyshould be taken into account in evaluations of monetary policy.