The demand for Divisia money in the United States: evidence from the CFS Divisia M3 aggregate

Gabriel De La Fuente, Luis P. De La Horra and Javier Perote

Applied Economics Letters, 2020, vol. 27, issue 1, 41-45

Abstract: In this paper, we analyse the demand for real money balances in the United States for the period 1990Q1–2017Q2 using a novel Divisia monetary aggregate developed by Barnett et al. (2013). Unlike simple-sum aggregates, Divisia aggregates take into account the different degrees of ‘moneyness’ of each monetary asset. In addition, Divisia aggregates have shown to be empirically superior to simple-sum aggregates, providing stable money demand functions for different periods and countries. In a first stage, we test for cointegration and estimate a long-run equilibrium model. In a second stage, we estimate an error correction model to study the short-run dynamics. Consistent with previous research, our findings show the existence of a stable money demand function, which suggests that monetary aggregates, when properly measured, can be useful tools in the conduct of monetary policy.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:27:y:2020:i:1:p:41-45

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DOI: 10.1080/13504851.2019.1606403

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