Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-21T11:39:30.941Z Has data issue: false hasContentIssue false
  • English
  • Français

INTEREST RATES, MONEY, AND ECONOMIC ACTIVITY

Published online by Cambridge University Press:  10 December 2019

Cosmas Dery  and
Apostolos Serletis
Cosmas Dery
Affiliation:
University of Calgary
Apostolos Serletis*
Affiliation:
University of Calgary
*
Address correspondence to: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta, T2N 1N4, USA. e-mail: Serletis@ucalgary.ca, Phone: (403) 220-4092, Fax: (403) 282-5262, Web: http://econ.ucalgary.ca/serletis.htm
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we are motivated by the fact that little is known about the relative performance of broad and narrow Divisia monetary aggregates, and by recent work that tests and rejects the appropriateness of the aggregation assumptions that underlie the various monetary aggregates published by the Federal Reserve as well as a large number of monetary asset groupings suggested by earlier studies. We present a comprehensive comparison of narrow versus broad Divisia monetary aggregates within three classes of empirical models. We compute correlations between the cyclical components of Divisia monetary aggregates at different levels of aggregation and the cyclical component of industrial production. We test for Granger causality running from the Divisia aggregates to industrial production and various other measures of real economic activity. We also reestimate a structural vector autoregression based on earlier work by Leeper and Roush [(2003) Journal of Money, Credit, and Banking 35, 1217–1256] and Belongia and Ireland [(2015) Journal of Business and Economic Statistics 33, 255–269; (2016) Journal of Money, Credit and Banking 48, 1223–1266], modifying that earlier work using monthly rather than quarterly data and extending it, both using broad as well as narrower Divisia monetary aggregates and by allowing for Generalized autoregressive conditional heteroskedasticity (GARCH) behavior in the structural shocks.

Keywords

Divisia Monetary AggregatesNarrow MoneyBroad Money
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1842 - 1891
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This paper is based on Chapter 1 of Cosmas Dery’s Ph.D. thesis at the University of Calgary. We would like to thank two referees, William Barnett, Peter Ireland, Juan Rubio-Ramirez, and Jonas Arias for comments that greatly improved the paper. We also thank the following members of Cosmas’s dissertation committee: David Walls and Atsuko Tanaka.

References

REFERENCES

Arias, J. E., Caldara, D. and Rubio-Ramirez, J. F. (2019) The systematic component of monetary policy in SVARs: An agnostic identification procedure. Journal of Monetary Economics 101, 1–13.10.1016/j.jmoneco.2018.07.011CrossRefGoogle Scholar
Bagliano, F. C. and Favero, C. A. (1998) Measuring monetary policy with VAR models: An evaluation. European Economic Review 42, 1069–1112.10.1016/S0014-2921(98)00005-1CrossRefGoogle Scholar
Barnett, W. A. (1980) Economic monetary aggregates an application of index number and aggregation theory. Journal of Econometrics 14, 11–48.10.1016/0304-4076(80)90070-6CrossRefGoogle Scholar
Barnett, W. A. (2016) Friedman and Divisia monetary measures. In: Cord, R. A. and Hammond, D. (eds.), Milton Friedman: Contributions to Economics and Public Policy, pp. 265–291. Oxford: Oxford University Press.10.1093/acprof:oso/9780198704324.003.0016CrossRefGoogle Scholar
Barnett, W. A. and Chauvet, M. (2011) How better monetary statistics could have signaled the financial crisis. Journal of Econometrics 161, 6–23.10.1016/j.jeconom.2010.09.002CrossRefGoogle Scholar
Barnett, W. A., Liu, J., Mattson, R. S. and Van Den Noort, J. (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24, 101–124.10.1007/s11079-012-9257-1CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2014) The Barnett critique after three decades: A new Keynesian analysis. Journal of Econometrics 183, 5–21.10.1016/j.jeconom.2014.06.006CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2015) Interest rates and money in the measurement of monetary policy. Journal of Business and Economic Statistics 33, 255–269.10.1080/07350015.2014.946132CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2016) Money and output: Friedman and Schwartz revisited. Journal of Money, Credit and Banking 48, 1223–1266.10.1111/jmcb.12332CrossRefGoogle Scholar
Belongia, M. T. and Ireland, P. N. (2018) Targeting constant money growth at the zero lower bound. International Journal of Central Banking 14, 159–204.Google Scholar
Bernanke, B. S. and Blinder, A. S. (1992) The federal funds rate and the channels of monetary transmission. American Economic Review 82, 901–921.Google Scholar
Christiano, L. J. and Ljungqvist, L. (1988) Money does Granger-cause output in the bivariate money-output relation. Journal of Monetary Economics 22, 217–235.10.1016/0304-3932(88)90020-7CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L. (1999) Monetary policy shocks: What have we learned and to what end? In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, vol. 1, pp. 65–148. Amserdam: North Holland.10.1016/S1574-0048(99)01005-8CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.10.1086/426038CrossRefGoogle Scholar
Ellington, M. (2018) The case for Divisia monetary statistics: A Bayesian time-varying approach. Journal of Economic Dynamics and Control 96, 26–41.10.1016/j.jedc.2018.10.001CrossRefGoogle Scholar
Faust, J. (1998) The robustness of identified VAR conclusions about money. Carnegie-Rochester Conference Series on Public Policy, 49, 207–244.10.1016/S0167-2231(99)00009-3CrossRefGoogle Scholar
Friedman, B. M. and Kuttner, K. N. (1992) Money, income, prices, and interest rates. American Economic Review 82, 472–492.Google Scholar
Granger, C. W. J. (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37, 424–443.10.2307/1912791CrossRefGoogle Scholar
Hamilton, J. D. (2018) Why you should never use the Hodrick-Prescott filter. Review of Economics and Statistics 100, 831–843.10.1162/rest_a_00706CrossRefGoogle Scholar
Hanke, S. H. (2019) On measuring the money supply. World Economics 20, 55–63.Google Scholar
Hendrickson, J. R. (2014) Redundancy or mismeasurement? A reappraisal of money. Macroeconomic Dynamics 18, 1437–1465.10.1017/S1365100512001034CrossRefGoogle Scholar
Hodrick, R. J. and Prescott, E. C. (1980) Postwar U.S. business cycles: An empirical investigation. Discussion Paper No. 451, Carnegie-Mellon University.Google Scholar
Jadidzadeh, A. and Serletis, A. (2019) The demand for assets and optimal monetary aggregation. Journal of Money, Credit and Banking 51, 929–952.10.1111/jmcb.12550CrossRefGoogle Scholar
Keating, J., Kelly, L., Smith, A. and Valcarcel, V. (2019) A model of monetary policy shocks for financial crises and normal conditions. Journal of Money, Credit and Banking 51, 227–259.10.1111/jmcb.12522CrossRefGoogle Scholar
Kim, S. (1999) Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries. Journal of International Economics 48, 387–412.10.1016/S0022-1996(98)00052-XCrossRefGoogle Scholar
King, R. G. and Plosser, C. I. (1984) Money, credit, and prices in a real business cycle. American Economic Review 74, 363–380.Google Scholar
Kydland, F. E. and Prescott, E. C. (1990) Business cycles: Real facts and a monetary myth. Federal Reserve Bank of Minneapolis. Quarterly Review 14, 383–398.Google Scholar
Leeper, E. M. and Roush, J. E. (2003) Putting “ M” back in monetary policy. Journal of Money, Credit, and Banking 35, 1217–1256.10.1353/mcb.2004.0031CrossRefGoogle Scholar
Leeper, E., Sims, C. and Zha, T. (1996) What does monetary policy do? Brookings Papers on Economic Activity 27, 1–78.10.2307/2534619CrossRefGoogle Scholar
Litterman, R. B. and Weiss, L. (1985) Money, real interest rates and output: A reinterpretation of postwar US data. Econometrica 53, 129–156.10.2307/1911728CrossRefGoogle Scholar
Martin, V., Hurn, S. and Harris, D. (2013) Econometric Modelling with Time Series: Specification, Estimation and Testing. Cambridge: Cambridge University Press.Google Scholar
McCallum, B. T. and Nelson, E. (2011) Money and inflation: Some critical issues. In Friedman, B. M. and Woodford, M. (eds.), Handbook of Monetary Economics, vol. 3A, pp. 97–153. Amsterdam: Elsevier.Google Scholar
Pagan, A. (1984) Econometric issues in the analysis of regressions with generated regressors. International Economic Review 25, 221–247.10.2307/2648877CrossRefGoogle Scholar
Sentana, E. and Fiorentini, G. (2001) Identification, estimation and testing of conditionally heteroskedastic factor models. Journal of Econometrics 102, 143–164.10.1016/S0304-4076(01)00051-3CrossRefGoogle Scholar
Serletis, A. and Gogas, P. (2014) Divisia monetary aggregates, the great ratios, and classical money demand functions. Journal of Money, Credit and Banking 46, 229–241.10.1111/jmcb.12103CrossRefGoogle Scholar
Sims, C. A. (1980a) Comparison of interwar and postwar business cycles. American Economic Review 70, 250–257.Google Scholar
Sims, C. A. (1980b) Macroeconomics and reality. Econometrica 48, 1–48.10.2307/1912017CrossRefGoogle Scholar
Sims, C. A. (1986) Are forecasting models usable for policy analysis? Minneapolis Federal Reserve Bank Quarterly Review 10, 2–16.Google Scholar
Sims, C. A. (1992) Interpreting the macroeconomic time series facts: The effects of monetary policy. European Economic Review 36, 975–1000.10.1016/0014-2921(92)90041-TCrossRefGoogle Scholar
Taylor, J. B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195–214.10.1016/0167-2231(93)90009-LCrossRefGoogle Scholar
Uhlig, H. (2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52, 381–419.10.1016/j.jmoneco.2004.05.007CrossRefGoogle Scholar
Supplementary material: PDF

Dery and Serletis supplementary material

Online Appendix

Download Dery and Serletis supplementary material(PDF)
PDF 7.6 MB