Incorporating Risky Assets In Divisia Monetary Aggregates

Capital uncertain or risky assets are typically excluded from traditional broad monetary aggregates. Barnett et al (1997), however, extend the Divisia aggregation methodology to incorporate such assets. In addition, recent evidence provided by Drake et al (1998) suggests that risky assets are close substitutes for monetary assets. This paper constructs “wide” Divisia monetary aggregates which include risky assets such as unit trusts (mutual funds), equities and bonds, and contrasts their empirical properties with conventional Divisia and simple sum broad money aggregates. The key finding in the paper is that a “wide” monetary aggregate, which incorporates unit trusts, exhibits a stable long run and dynamic money demand function, has good leading indicator properties in the context of Granger causality tests, and tends to outperform all other aggregates on the basis of non-nested tests.