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Functional Monetary Aggregates, Monetary Policy, and Business Cycles

Author

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  • Libo Xu

Abstract

In this paper, we take the economic approach to monetary aggregation. In the context of highly disaggregated demand systems, encompassing the full range of monetary assets in the United States, we estimate the effectively globally regular minflex Laurent (ML) and normalized quadratic (NQ) flexible functional forms. We produce the ML and NQ functional monetary aggregates, consistent with neoclassical microeconomic theory, also addressing the issue of optimal monetary aggregation. We highlight the influence of measurement on statistical inference by investigating whether the ML and NQ functional monetary aggregates are of importance in resolving paradoxes associated with the measurement of money. In doing so, we also provide a comparison between the functional monetary aggregates and the Fed's (broad) Sum M2 aggregate and the Center for Financial Stability (broad) Divisia M3 and Divisia M4 aggregates. Our detailed statistical analysis favors the functional monetary aggregates.

Suggested Citation

  • Libo Xu, "undated". "Functional Monetary Aggregates, Monetary Policy, and Business Cycles," Working Papers 2020-04, Department of Economics, University of Calgary, revised 22 Sep 2020.
    • Handle: RePEc:clg:wpaper:2020-04
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    File URL: https://econ.ucalgary.ca/sites/econ.ucalgary.ca.manageprofile/files/unitis/publications/1-10580338/Serletis_and_Xu_Sep_2020.pdf
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    Citations

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    Cited by:

    1. Neepa Gaekwad & William Barnett, 2024. "Multilateral Divisia monetary aggregates for the Euro area," Economics Bulletin, AccessEcon, vol. 44(3), pages 1224-1241.
    2. Neepa Gaekad & William A. Barnett, 2024. "Multilateral Divisia Monetary Aggregates for the Euro Area," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202416, University of Kansas, Department of Economics.
    3. Serletis, Apostolos & Xu, Libo, 2021. "The welfare cost of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 128(C).
    4. Ida, Daisuke, 2023. "The effect of real money balances on international monetary policy transmission," Journal of International Money and Finance, Elsevier, vol. 139(C).
    5. Libo Xu & Apostolos Serletis, 2022. "The Demand for Assets: Evidence from the Markov Switching Normalized Quadratic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 989-1025, June.
    6. Barnett, William & Gaekwad, Neepa, 2021. "Multilateral Divisia monetary aggregates for the Euro Area," MPRA Paper 105528, University Library of Munich, Germany.
    7. Ioannis Andreadis & Athanasios D. Fragkou & Theodoros E. Karakasidis & Apostolos Serletis, 2023. "Nonlinear dynamics in Divisia monetary aggregates: an application of recurrence quantification analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-17, December.
    8. Fleissig, Adrian R. & Jones, Barry E., 2023. "U.K. household-sector money demand during Brexit and the pandemic," Economic Modelling, Elsevier, vol. 123(C).
    9. Azad, Nahiyan Faisal & Serletis, Apostolos, 2022. "A century and a half of the monetary base-stock market relationship," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 118-124.
    10. Adrian R. Fleissig & James L. Swofford, 2023. "Habit persistence in assets demand," Southern Economic Journal, John Wiley & Sons, vol. 89(3), pages 975-985, January.
    11. Ida, Daisuke, 2024. "The neo-Fisherian effect in a new Keynesian model with real money balances," MPRA Paper 120575, University Library of Munich, Germany.

    More about this item

    Keywords

    Flexible functional forms; Demand systems; Divisia monetary aggregates; Monetary policy; Business cycle analysis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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