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Money and macroeconomic performance: revisiting divisia money

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  • Darrat, Ali F.
  • Chopin, Marc C.
  • Lobo, Bento J.

Abstract

Recent research suggests that the relation between money and the macroeconomy has sharply weakened in the U.S. after 1980. We reexamine this alleged breakdown by testing for cointegration between the macroeconomy and simple‐sum and Divisia monetary aggregates. We check the robustness of our results by modeling multiple key breakpoints around the early 1980s. Unlike the case of simple‐sum monetary aggregates, the evidence is overwhelming in its support for cointegration between Divisia money and macroeconomic variables, which persists despite several policy shifts and dramatic financial innovations in the post‐1980 period. These results support Divisia money over simple‐sum monetary aggregates as a guide in the implementation of monetary policy.
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  • Darrat, Ali F. & Chopin, Marc C. & Lobo, Bento J., 2005. "Money and macroeconomic performance: revisiting divisia money," Review of Financial Economics, Elsevier, vol. 14(2), pages 93-101.
    • Handle: RePEc:eee:revfin:v:14:y:2005:i:2:p:93-101
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    1. Chris Florakis & Gianluigi Giorgioni & Alexandros Kostakis & Costas Milas, 2012. "The Impact of Stock Market Illiquidity on Real UK GDP Growth," Working Paper series 65_12, Rimini Centre for Economic Analysis.
    2. Seitz, Franz & Baumann, Ursel & Albuquerque, Bruno, 2015. "The information content of money and credit for US activity," Working Paper Series 1803, European Central Bank.
    3. Chin-Hong, Puah & Lee-Chea, Hiew, 2010. "Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia," MPRA Paper 31731, University Library of Munich, Germany.
    4. Ryan S. Mattson & Philippe de Peretti, 2014. "Investigating the Role of Real Divisia Money in Persistence-Robust Econometric Models," Working Papers hal-00984827, HAL.
    5. repec:eid:wpaper:18/09 is not listed on IDEAS
    6. Periklis Gogas & Theophilos Papadimitriou & Elvira Takli, 2013. "Comparison of simple sum and Divisia monetary aggregates in GDP forecasting: a support vector machines approach," Economics Bulletin, AccessEcon, vol. 33(2), pages 1101-1115.
    7. Hiew, Lee-Chea & Puah, Chin-Hong & Habibullah, Muzafar Shah, 2013. "The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function," MPRA Paper 50223, University Library of Munich, Germany.
    8. Darrat, Ali F. & Al-Sowaidi, Saif S., 2009. "Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies," Review of Financial Economics, Elsevier, vol. 18(3), pages 124-131, August.
    9. Tang, Maggie May-Jean & Puah, Chin-Hong & Awang Marikan, Dayang-Affizzah, 2013. "Empirical Evidence on the Long-Run Neutrality Hypothesis Using Divisia Money," MPRA Paper 50020, University Library of Munich, Germany.
    10. Albuquerque, Bruno & Baumann, Ursel & Seitz, Franz, 2016. "What does money and credit tell us about real activity in the United States?," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 328-347.
    11. Ali F. Darrat & Saif S. Al‐Sowaidi, 2009. "Financial progress and the stability of long‐run money demand: Implications for the conduct of monetary policy in emerging economies," Review of Financial Economics, John Wiley & Sons, vol. 18(3), pages 124-131, August.
    12. William A. Barnett & Kun He & Jingtong He, 2022. "Consumption Loan Augmented Divisia Monetary Index and China Monetary Aggregation," JRFM, MDPI, vol. 15(10), pages 1-17, October.
    13. Christopher Martin & Costas Milas, 2009. "Causes of the Financial Crisis: an Assessment Using UK Data," Working Paper series 10_09, Rimini Centre for Economic Analysis.
    14. Ellington, Michael & Milas, Costas, 2019. "Global liquidity, money growth and UK inflation," Journal of Financial Stability, Elsevier, vol. 42(C), pages 67-74.
    15. João Tovar Jalles, 2019. "Monetary Aggregates and Macroeconomic Performance: The Portuguese Escudo, 1911–1999," International Economic Journal, Taylor & Francis Journals, vol. 33(4), pages 719-740, October.
    16. Christopher Martin & Costas Milas, 2010. "Financial Market Liquidity and the Financial Crisis: An Assessment Using UK Data," International Finance, Wiley Blackwell, vol. 13(3), pages 443-459, December.
    17. Florackis, Chris & Giorgioni, Gianluigi & Kostakis, Alexandros & Milas, Costas, 2014. "On stock market illiquidity and real-time GDP growth," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 210-229.
    18. Hong, Puah & Leong, Choi-Meng & Mansor, Shazali & Lau, Evan, 2018. "Revisiting Money Demand in Malaysia: Simple-Sum versus Divisia Monetary Aggregates," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(2), pages 267-278.

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