Interest Rates, Money, and Economic Activity

Abstract

In this paper, we are motivated by the fact that little is known about the relative performance of broad and narrow Divisia monetary aggregates, and by recent work that tests and rejects the appropriateness of the aggregation assumptions that underlie the various monetary aggregates published by the Federal Reserve as well as a large number of monetary asset groupings suggested by earlier studies. We present a comprehensive comparison of narrow versus broad Divisia monetary aggregates within three classes of empirical models. We compute correlations between the cyclical components of Divisia monetary aggregates at different levels of aggregation and the cyclical component of industrial production. We test for Granger causality running from the Divisia aggregates to industrial production and various other measures of real economic activity. We also reestimate a structural vector autoregression based on earlier work by Leeper and Roush [(2003) Journal of Money, Credit, and Banking 35, 1217–1256] and Belongia and Ireland [(2015) Journal of Business and Economic Statistics 33, 255–269; (2016) Journal of Money, Credit and Banking 48, 1223–1266], modifying that earlier work using monthly rather than quarterly data and extending it, both using broad as well as narrower Divisia monetary aggregates and by allowing for Generalized autoregressive conditional heteroskedasticity (GARCH) behavior in the structural shocks.

Divisia monetary aggregates for a heterogeneous euro area

“…Barnett and Chauvet (2011) observe that U.S. monetary aggregates and their Divisia counterparts diverge particularly during times of high uncertainty indicating that this divergence can be used as a signal for impending recessions. More recently, Belongia and Ireland (2015) and Dery and Serletis (2020) confirm the information content of Divisia aggregates for the United States.…”

“…The focus of the current paper is on euro area Divisia aggregates that correspond to the simple sum aggregate M2 and, thus, to a relatively narrow definition of money. For the United States, Dery and Serletis (2020) showed that the picture of the liquidity situation in the economy becomes more complete the broader the set of monetary assets that is accounted for. 6 This suggests that the analysis of broader Divisia indices could be a promising route for future research on the information content of monetary aggregates and their role for the transmission process of monetary policy.…”

Disentangling the Effects of Uncertainty, Monetary Policy and Leverage Shocks on the Economy*

“…They argue that properly measured monetary aggregates, such as the new Center for Financial Stability (CFS) Divisia monetary aggregates, can and should play an important role for the conduct of monetary policy, in addition to that of the short‐term nominal interest rate. Thus, we follow Jadidzadeh and Serletis (2019) and Dery and Serletis (2021) and use the CFS broad Divisia monetary aggregates – Divisia M3, Divisia M4‐, and Divisia M4. See Barnett et al .…”

“…As can be seen both in (log) levels and growth rates, the aggregates are clearly distinguishable. In our main analysis, we use the Divisia M3 aggregate, as it has been favored in the empirical analysis by Dery and Serletis (2021), but we also assess the robustness of our main findings to the use of the Divisia M4‐ and Divisia M4 monetary aggregates.…”

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

“…When the right measures of money stock are employed, the quantity of money is shown to have important macroeconomic properties. Dery and Serletis (2019) examine the cyclical behavior of Divisia money index and find support for a monetary effect on the business cycle. Their findings highlight the importance of using broad Divisia monetary aggregates.…”