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From Money Growth to Consumer Spending: Forecasting with Divisia Monetary Aggregates

Author

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  • Chen, Zhengyang

Abstract

This paper examines how money growth affects personal consumption using Divisia monetary aggregates. Using monthly U.S. data from 2000 to 2023, we find that changes in Divisia M4 significantly predict personal consumption expenditure, with a lag of three months. A 1% increase in Divisia M4 is associated with a 0.3% increase in consumption, controlling for macroeconomic factors. Through five-fold cross-validation, we demonstrate that Divisia-based forecasting models reduce prediction errors by 20% compared to models using the federal funds rate. Our findings suggest that broader monetary aggregates contain important predictive information for consumption dynamics, particularly when interest rates are low.

Suggested Citation

  • Chen, Zhengyang, 2025. "From Money Growth to Consumer Spending: Forecasting with Divisia Monetary Aggregates," EconStor Preprints 308692, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:308692
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    More about this item

    Keywords

    Divisia money; Consumption; Forecasting;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E - Macroeconomics and Monetary Economics

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