THE CASE FOR DIVISIA MONEY TARGETING

Apostolos Serletis and Sajjadur Rahman

Macroeconomic Dynamics, 2013, vol. 17, issue 8, 1638-1658

Abstract: In this paper we investigate the relationship between money growth uncertainty and the level of economic activity in the United States. We pay explicit attention to the Divisia monetary aggregates. In doing so, we use the new vintage of the data [called MSI (monetary services indices) by the St. Louis Fed], together with the simple sum monetary aggregates, over the period from 1967:1 to 2011:3. In the context of a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model, we show that increased Divisia money growth volatility (irrespective of the level of aggregation and the method of calculation) is associated with a lower average growth rate of real economic activity. However, there are no effects of simple-sum money growth volatility on real economic activity, except with the Sum M1 and perhaps Sum M2M aggregates. We conclude that monetary policies that focus on the Divisia monetary aggregates and target their growth rates will contribute to higher overall economic growth.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:17:y:2013:i:08:p:1638-1658_00

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