Barnett, William and Gaekwad, Neepa (2017): The Demand for Money for EMU: A Flexible Functional Form Approach.

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Abstract
Monetary aggregates have a special role under the "two pillar strategy" of the ECB. Hence, the need for a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the EMU11 countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate in accordance with Barnett (2007). The multilateral Divisia monetary aggregate for the EMU11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU11 within the framework of a representative consumer's utility function, using Barnett’s (1983) locally flexible functional form, the minflex Laurent Indirect utility function. The analysis of elasticities with respect to the asset’s usercost prices shows that: (i) transaction balances (TB) and deposits redeemable at notice (DRN) are income elastic, (ii) the DRN display large variation in price elasticity, and (iii) the monetary assets are not good substitutes for each other within the EMU11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB has Divisia monetary aggregates provided to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City.
Item Type:  MPRA Paper 

Original Title:  The Demand for Money for EMU: A Flexible Functional Form Approach 
Language:  English 
Keywords:  Divisia monetary aggregation, European Monetary Union, monetary aggregation theory, multilateral aggregation, minflex Laurent, elasticities of demand 
Subjects:  C  Mathematical and Quantitative Methods > C4  Econometric and Statistical Methods: Special Topics > C43  Index Numbers and Aggregation C  Mathematical and Quantitative Methods > C8  Data Collection and Data Estimation Methodology ; Computer Programs > C82  Methodology for Collecting, Estimating, and Organizing Macroeconomic Data ; Data Access D  Microeconomics > D1  Household Behavior and Family Economics > D12  Consumer Economics: Empirical Analysis E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E51  Money Supply ; Credit ; Money Multipliers F  International Economics > F3  International Finance > F33  International Monetary Arrangements and Institutions 
Item ID:  81466 
Depositing User:  William A. Barnett 
Date Deposited:  20 Sep 2017 09:12 
Last Modified:  20 Sep 2017 09:13 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/81466 