A NOTE ON THE POLICY IMPLICATIONS OF USING DIVISIA CONSUMPTION AND MONETARY AGGREGATES

Leigh Drake and Adrian R. Fleissig

Macroeconomic Dynamics, 2008, vol. 12, issue 1, 132-149

Abstract: Using U.K. data that are consistent with utility maximizing behavior by consumers, we construct aggregates for both consumption goods (nondurables and services) and monetary assets that are consistent with economic aggregation theory. Using these aggregates and the stock of durable goods, we estimate the elasticities of substitution between various consumption goods and monetary assets. These estimates are compared to the corresponding results from conventional monetary and consumption aggregates. The results give important information for monetary policy and the monetary transmission mechanism. In particular, these substitution estimates provide insight into the recent changes in expenditure on durable goods. We also show that the use of conventional U.K. consumption and monetary aggregates often give incorrect estimates of substitution and can provide misleading policy insights.

Date: 2008
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