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

PDF
MPRA_paper_81466.pdf Download (370kB)  Preview 
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:  26 Sep 2019 16:56 
References:  Barnett, W.A., 1978. The user cost of money. Economics Letters 1, 145149 In: Barnett, W.A., Serletis, A., (Eds.), The Theory of Monetary Aggregation. (Reprinted) Elsevier, Amsterdam, pp. 610. Barnett, W.A., 1980. Economic monetary aggregates: an application of aggregation and index number theory. Journal of Econometrics 14, 1148 In: Barnett, W.A., Serletis, A. (Eds.), The Theory of Monetary Aggregation, (Reprinted) Elsevier, Amsterdam, PP.1148. Barnett, W. A ., Edward K. Offenbacher, and Paul A. Spindt (1981), "New Concepts of Aggregated Money." Journal of Finance 36, 497505. Barnett, W.A. (1983). “New indices of money supply and the flexible Laurent demand system”. Journal of Business and Economic Statistics 1: 723. Barnett,W A., Edward K. Offenbacher, and Paul A. Spindt. (1984) "The New Divisia Monetary Aggregates." Journal of Political Economy 92, 104985. Barnett WA, Lee Y. W. 1985. The global properties of the minflex Laurent, generalized Leontief, and translog flexible functional forms. Econometrica 53: 14211437. Barnett, W.A., 2003. Aggregationtheoretic monetary aggregation over the euro area, when countries are heterogeneous. European Central Bank Working Paper no. 260. Frankfurt. Barnett, W. A, 2007. Multilateral AggregationTheoretic Monetary Aggregation over Heterogeneous Countries. Journal of Econometrics, vol 136, no 2, pp 457482. Barnett, W. A. and Chauvet, M., 2011. "How better monetary statistics could have signaled the financial crisis." Journal of Econometrics, 161(1):623. Barnett W A, 2012. Getting it wrong. How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy. MIT Press. Barnett, W. A., Liu J, Ryan S. Mattson R. S, and van den Noort J., 2013, `The New CFS Divisia Monetary Aggregates: Design, Construction, and Data Sources', Open Economies Review 24, 101124. Barten A. P. 1969. Maximum likelihood estimation of a complete system of demand equations. European Economic Review 1: 773. Belongia, M.T. and P.N. Ireland (2006). “The OwnPrice of Money and the Channels of Monetary Transmission.” Journal of Money, Credit, and Banking 38: 42945. Belongia, M.T. and P.N. Ireland (2014). “The Barnett Critique after Three Decades: A New Keynesian Analysis”. Journal of Econometrics 183(1): 521. Belongia, M.T. and P.N. Ireland (2015a). “Interest Rates and Money in the Measurement of Monetary Policy.” Journal of Business and Economic Statistics 332: 255269. Belongia, M.T. and P.N. Ireland (2015b).“A ‘Working’ Solution to the Question of Nominal GDP Targeting.”Macroeconomic Dynamics 19: 508534. Belongia, M.T. and P.N. Ireland (2016). “Money and Output: Friedman and Schwartz Revisited.” Journal of Money, Credit and Banking 48(6): 12231266. Benati, Luca (2008). “Investigating inflation persistence across monetary regimes”, Quarterly Journal of Economics, 123(3), 1005  1060. Benati, Luca (2009), "Long run evidence on money growth and inflation", ECB Working Paper No. 1027, European Central Bank. Beyer, A. (2008) Euro Area Money Demand is Stable!, Mimeo presented at NCB Expert Workshop, Frankfurt am Main, 14 November. Blackorby, C. and R.R. Russell 1989. "Will the real elasticity of substitution please stand up?" American Economic Review 79, 882888. Boone, L. Mikol, F. and Van den Noord, P. (2004). Wealth Effects on Money Demand in EMU: Econometric Evidence, OECD Economics Department Working Papers 411. Bruggeman, A., G. CambaMendez, B. Fischer and J. Sousa (2005), “Structural filters for monetary analysis: the inflationary movements of money in the euro area”, ECB Working Paper no. 470. Chan, W and Nautz, D. (2015) “The information content of monetary statistics for the Great Recession: Evidence from Germany” SFB 649 Discussion Paper 2015027. Cherchye, L., T. Demuynck, B. D. Rock, and P. Hjerstrand (2015), “Revealed Preference Tests for Weak Separability: An Integer Programming Approach,” Journal of Econometrics 186(1): 129141. Darvas, Z. (2015). "Does money matter in the euro area? Evidence from a new Divisia index" Economic Letters 133, 123126. Fisher, I. (1922). The Making of Index Numbers: A Study of Their Varieties, Tests, and Reliability, Boston: Houghton Mifflin. Gerlach, S. and K. AssenmacherWesche (2006), “Interpreting euro area inflation at high and low frequencies”, BIS Working Paper no. 195. Gorman WM. 1959. Separable utility and aggregation. Econometrica 27: 469481. Hjertstrand, Per, J. L. Swofford, and G. Whitney (2016). “Mixed Integer Programming Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure, and Money,” Journal of Money, Credit, and Banking 48(7): 15471561. Neumann, M. J. M. and C. Greiber (2004), “Inflation and core money growth in the euro area”, Bundesbank Discussion Paper no. 36/2004. Rayton, B. A. and Pavlyk, K., 2010. "On the recent divergence between measures of the money supply in the UK." Economics Letters, 108(2):159162. Serletis, A. and P. Gogas (2014).“ Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions,” Journal of Money, Credit and Banking 46(1): 22941. Serletis, A. and S. Rahman (2013). “The Case for Divisia Money Targeting,” Macroeconomic Dynamics 17: 16381658. Serletis, A., and Robb. A. L. 1986. "Divisia aggregation and substitutability among monetary assets." Journal of Money, Credit, and Banking 18, 430446. Serletis, A., Shahmoradi, A., 2005. Seminonparametric estimates of the demand for money in the United States. Macroeconomic Dynamics 9(4), 542559. Serletis, A., Shahmoradi, A., 2007. Flexible functional forms, curvature conditions, and the demand for assets. Macroeconomic Dynamics 11, 455486. Stracca, L. (2004). Does Liquidity Matter? Properties of a Divisia Monetary Aggregate in the Euro Area. Oxford Bulletin of Economics and Statistics 66 (3), 309331. Strotz RH. 1957. The empirical implications of a utility tree. Econometrica 25: 169180. Strotz RH. 1959. The utility tree: a correction and further appraisal. Econometrica 27: 482488. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/81466 