The role of the broadest money: tracking economic signal

Hyun Park and Sohee Park

Macroeconomic Dynamics, 2026, vol. 30, -

Abstract: This paper investigates the empirical implications of the broadest Divisia-type monetary aggregates. We first analyze the simple causal relationship between real economic variables and a range of monetary aggregates, then estimate both a traditional recursive VAR model and a non-recursive VAR model. By examining impulse responses and the equational forms of underlying economic shocks, we gain insights into the implications of various monetary aggregates. Our findings indicate that the broadest Divisia-type monetary aggregates exhibit strong causality with various real economic variables. Furthermore, the structural equations obtained from non-recursive VAR estimation suggest that the Money-interest rate rule, centered on money as a primary policy instrument, yields results precisely consistent with the benchmark across almost all ranges of credit-card-augmented Divisia monetary aggregates. Under this rule, the broadest credit-card-augmented Divisia monetary aggregate enhances the precision of tracking contemporary economic conditions and mitigates common anomalies, such as puzzle problems.

Date: 2026
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