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The Demand for Divisia Money: Theory and Evidence

Michael Belongia () and Peter Ireland ()

No 937, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to spending or income as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear in quarterly United States data spanning the period from 1967:1 through 2017:2, especially for the Divisia M2 aggregate. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.

Keywords: Divisia monetary aggregates; money demand; money-in-the-utility function (search for similar items in EconPapers)
JEL-codes: C43 E41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
Date: 2017-11-01
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