Does Money Matter in the Is Curve? The Case of the Uk

Abstract

Narrow and broad money measures (including Divisia aggregates) have been found to have explanatory power for UK output in backwardlooking specifications of the IS curve. In this paper, we explore whether or not real balances enter into a forward-looking IS curve for the UK. To do this, we test for additive separability between consumption and money over a sizeable part of the post-Exchange Rate Mechanism period using non-parametric methods. A main finding is that the UK data seem to be broadly consistent with additive separability for the more recent period from 1999 to 2007.

Household‐sector Money Demand for the Uk

“…Elger et al . (2008) estimate a backward‐looking IS curve for the UK that is very close to the one in Nelson (2002) and find positive and significant effects of real Divisia money growth 4 Jones and Stracca (2008…”

“…Recent studies relating to the Bank of England's newly revised Divisia indexes include Elger et al . (2008), Jones and Stracca (2008) and Drake and Fleissig (2009).…”

“…The most significant change is that non-break-adjusted levels data, but break-adjusted flows data, are currently used to construct the indexes (see Hancock, 2005, p. 43), whereas previously break-adjusted levels data had been used. Recent studies relating to the Bank of England's newly revised Divisia indexes include Elger et al (2008), Jones and Stracca (2008) and Drake and Fleissig (2009). Elger et al (2008) test groupings of UK household-sector monetary assets for weak separability, which is a key admissibility property in aggregation theory.…”

“…Elger et al (2008) estimate a backward-looking IS curve for the UK that is very close to the one in Nelson (2002) and find positive and significant effects of real Divisia money growth. 4 Jones and Stracca (2008) test for additive separability between real money balances (measured by either a household-sector Divisia index or its components) and consumption for the UK to determine whether real balances enter into the forward-looking IS curve. Finally, Drake and Fleissig (2009) consider how elasticities of substitution are distorted in a Fourier model for the UK containing a Divisia monetary index, non-durables, services, and the stocks of durables and semidurables.…”

The New Consensus in Macroeconomics: A Critical Appraisal

“…The standard way is to resort to the money-in-the-utility function models, whereby real money balances are supposed to affect the marginal utility of consumption and, as such, enter equation (1) (2006), and Jones and Stracca (2008) suggest that there is little evidence that supports the inclusion of real money balances in equation (1) in the cases of the United States, the euro area, and the UK. Friedman (2003: 6) appears to be correct when he argues that without "integrating the credit markets into both the theoretical and the practical analysis of monetary policy is going to be harder."…”