Divisia Monetary Aggregates for Russia: Money Demand, GDP Nowcasting, and the Price Puzzle

Makram El-Shagi and Kiril Tochkov

No 2021/1, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: The lack of developed financial markets and well-functioning transmission channels assigns monetary aggregates in emerging economies the potential role of nominal anchor, intermediate target, or informational variable for monetary policy. The effectiveness of this approach relies crucially on the correct measurement of money, which is not fulfilled by the conventional index based on the simple sum of financial assets. This paper calculates alternative Divisia monetary aggregates for Russia over the period 1998-2019, which account for the level of liquidity of a given monetary asset by assigning weights according to the usefulness of that asset for transaction services. Divisia is found to follow a growth pattern markedly different from the simple sum, whereby deviations between the two series are even more pronounced when foreign-currency accounts are included. We conduct three empirical exercises to demonstrate the advantages of Divisia over the simple sum. Divisia confirms the stability of the money demand function and reflects portfolio shifts in response to changes in the opportunity cost of simple sum. Lastly, Divisia mitigates the price puzzle phenomenon relative to the conventional measure. We conclude that Divisia monetary aggregates would improve the effectiveness of monetary policy in Russia.

Keywords: Monetary policy; monetary aggregates; Divisia; nowcasting; Russia (search for similar items in EconPapers)
JEL-codes: C43 E41 E52 O52 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cba, nep-cis, nep-mac, nep-mon and nep-tra
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Journal Article: Divisia monetary aggregates for Russia: Money demand, GDP nowcasting and the price puzzle (2022)
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