INCORPORATING RISKY ASSETS IN DIVISIA MONETARY AGGREGATES
Abstract
Capital uncertain or risky assets are typically excluded from traditional broad monetary aggregates. Barnett et al (1997), however, extend the Divisia aggregation methodology to incorporate such assets. In addition, recent evidence provided by Drake et al (1998) suggests that risky assets are close substitutes for monetary assets. This paper constructs “wide” Divisia monetary aggregates which include risky assets such as unit trusts (mutual funds), equities and bonds, and contrasts their empirical properties with conventional Divisia and simple sum broad money aggregates. The key finding in the paper is that a “wide” monetary aggregate, which incorporates unit trusts, exhibits a stable long run and dynamic money demand function, has good leading indicator properties in the context of Granger causality tests, and tends to outperform all other aggregates on the basis of non-nested tests.
JEL : E41, C43, E52
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References
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Drake, Leigh. (1996), “Relative Prices in the UK Personal Sector Money Demand Function”, Economic Journal, 106 (September), 1209 -1227.
Drake, Leigh (1997), “Non-Parametric Demand Analysis of Personal Sector Decisions On Consumption, Leisure and Monetary Assets”, Review of Economics and Statistics, 79(4), 679-682.
Drake, Leigh and K Alec Chrystal (1994), “Company-Sector Money Demand: New Evidence on The Existence of a Stable Long-Run Relationship for The United Kingdom”, Journal of Money Credit and Banking Vol 26/3 (August 1994, Part 1).
Drake, Leigh and K Alec Chrystal and Jane Binner (1994), “Weighted Monetary Aggregates for the UK”, Loughborough University Discussion Paper 94/9.
Drake, Leigh., Adrian R,. Fleissig, and James L. Swofford. “A Semi Nonparametric Approach to Neoclassical Consumer Theory and Demand for UK Monetary Assets”, St Louis University Research Paper, 1997.
Drake, Leigh., and K. Alec Chrystal., “Personal Sector Money Demand in the UK”. Oxford Economic Papers, 49(2) April, 1997, 188-206.
Drake, Leigh, Adrian.R Fleissig, and Andy Mullineux (1998), “Are Risky Assets Substitutes for monetary Assets”, forthcoming in Economic Inquiry.
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Hendry, D.F., and Doornik, J.A. (1994) Modelling Linear Dynamic Econometric Systems. Scottish Journal of Political Economy, Vol 41, pp. 1-33.
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Johansen, S (1988) “Statistical Analysis of Cointegrating Vectors”, Journal of Economic Dynamic and Control, 231-54.
Johansen, S (1995) “Likelihood-based Inference in Cointegrated Vector Autoregressive Models”, New York: Oxford University Press.
Johansen, S and Juselius, K (1990) “Maximum likelihood estimation and inference. On cointegration- with applications to the demand for money”, Oxford Bulletin of Economics and Statistics. May, 1-15.
Orphanides A. and R.M. Solow (1990), “Money, Inflation and Growth”, in B.M. Friedman and F.H. Hahn (eds), Handbook of Monetary Economics, Amsterdam: North Holland.
Orphanides, A., B. Reid, and D.H. Small. “The Empirical Properties Of A Monetary aggregate That Adds Bond and Stock Funds To M2,” Federal Reserve Bank of St.Louis Review, 76(4), 1994, 31-51.
Patterson, K.D. (1991), “A Non-Parametric Analysis of Personal Sector Decision on Consumption, liquidity Assets and Leisure”, The Economic Journal, V 101(408), 1103-1116
Reimers, H.E. (1992). Comparison of tests for multivariate cointegration. Statistical Papers, Vol. 33, pp. 335-59.
Spencer, Peter D, (1986), Financial Innovation, Efficiency and Disequilibrium, Oxford University Press, Oxford
Spencer, Peter D. (1994), “Portfolio Disequilibrium: Implication for the Divisia Approach to Monetary Aggregation” The Manchester School 4 XII(2) 125-50
Tobin J (1965) “Money and Economic Growth”, Econometrica, 33, 671-84.
Bank of England (1986), “Financial change and broad money”, Bank of England Quarterly Bulletin. 26(4), 499-507.
Barnett, William A. (1978), “The User Cost of Money”, Economics Letters, Vol 1(2), 14549.
Barnett, William A. (1980) “Economic Monetary Aggregates: An Application of Index Number Theory and Aggregation Theory”, Journal of Econometrics 14(1), 11-48.
Barnett, William A., Fisher, D. And Serletis, A. (1992) “Consumer Theory and the Demand for Money”, Journal of Economic Literature, Dec, 2086-2119.
Barnett, William A., Kirova, Milka, Liu, Yi, and Zhou, Ge, (1994) “Beyond the Risk Neutral Utility Function”, Mimeo.
Barnett William A and Liu, Yi (1995), “The CAPM - Extended Divisia with Exact Tracking under Risk”, Working Paper No 195, Department of Economics, University of Washington in St Louis.
Barnett, William A, Jensen, Mark C, and Liu, Yi (1997), “The CAPM Risk Adjustment for Exact Aggregation over Financial Assets,” Macroeconomic Dynamics, 1(2), May, 485- 512.
Collins, S.C. and Edwards, C.L. (1994). “An alternative Monetary Aggregate: M2 Plus Household Holding of Bond and equity Mutual Funds”, Federal Reserve Bank of St. LouisReview, Nov./Dec., pp. 7-29.
Drake, Leigh (1992), “The Substitutability of Financial Assets in The UK and the Implications for Monetary Aggregation”, Manchester School of Economics and Social Studies, V 60(3), 221-248.
Drake, Leigh. (1996), “Relative Prices in the UK Personal Sector Money Demand Function”, Economic Journal, 106 (September), 1209 -1227.
Drake, Leigh (1997), “Non-Parametric Demand Analysis of Personal Sector Decisions On Consumption, Leisure and Monetary Assets”, Review of Economics and Statistics, 79(4), 679-682.
Drake, Leigh and K Alec Chrystal (1994), “Company-Sector Money Demand: New Evidence on The Existence of a Stable Long-Run Relationship for The United Kingdom”, Journal of Money Credit and Banking Vol 26/3 (August 1994, Part 1).
Drake, Leigh and K Alec Chrystal and Jane Binner (1994), “Weighted Monetary Aggregates for the UK”, Loughborough University Discussion Paper 94/9.
Drake, Leigh., Adrian R,. Fleissig, and James L. Swofford. “A Semi Nonparametric Approach to Neoclassical Consumer Theory and Demand for UK Monetary Assets”, St Louis University Research Paper, 1997.
Drake, Leigh., and K. Alec Chrystal., “Personal Sector Money Demand in the UK”. Oxford Economic Papers, 49(2) April, 1997, 188-206.
Drake, Leigh, Adrian.R Fleissig, and Andy Mullineux (1998), “Are Risky Assets Substitutes for monetary Assets”, forthcoming in Economic Inquiry.
Duca, John V “Should Bond Funds be Added to M2?”, Journal of Banking and Finance 19, 1995, 131-52.
Engle, R.F. and Granger, C.W.J. (1937). Cointegration and Error-Correction: Representation, Estimation and Testing. Econometrica 55, pp 251-76.
Fisher, P., Hudson, S. and Pradhan, M. (1993). “Divisia Indices for Money: An Appraisal of Theory and Practice”, Bank of England Working Paper Series, April, 9.
Hendry, D.F., and Doornik, J.A. (1994) Modelling Linear Dynamic Econometric Systems. Scottish Journal of Political Economy, Vol 41, pp. 1-33.
Hendry, D.F., and Mizon, G.E. (1993). Evaluating dynamic econometric models by encompassing the VAR. In P.C.B. Phillips (ed.), Models, Methods, and Applications of Econometrics, Oxford: Basil Blackwell, pp. 272-300.
Hicks J R (1935), “A Suggestion for Simplifying the Theory of Money”, Economica, February 1-19.
Johansen, S (1988) “Statistical Analysis of Cointegrating Vectors”, Journal of Economic Dynamic and Control, 231-54.
Johansen, S (1995) “Likelihood-based Inference in Cointegrated Vector Autoregressive Models”, New York: Oxford University Press.
Johansen, S and Juselius, K (1990) “Maximum likelihood estimation and inference. On cointegration- with applications to the demand for money”, Oxford Bulletin of Economics and Statistics. May, 1-15.
Orphanides A. and R.M. Solow (1990), “Money, Inflation and Growth”, in B.M. Friedman and F.H. Hahn (eds), Handbook of Monetary Economics, Amsterdam: North Holland.
Orphanides, A., B. Reid, and D.H. Small. “The Empirical Properties Of A Monetary aggregate That Adds Bond and Stock Funds To M2,” Federal Reserve Bank of St.Louis Review, 76(4), 1994, 31-51.
Patterson, K.D. (1991), “A Non-Parametric Analysis of Personal Sector Decision on Consumption, liquidity Assets and Leisure”, The Economic Journal, V 101(408), 1103-1116
Reimers, H.E. (1992). Comparison of tests for multivariate cointegration. Statistical Papers, Vol. 33, pp. 335-59.
Spencer, Peter D, (1986), Financial Innovation, Efficiency and Disequilibrium, Oxford University Press, Oxford
Spencer, Peter D. (1994), “Portfolio Disequilibrium: Implication for the Divisia Approach to Monetary Aggregation” The Manchester School 4 XII(2) 125-50
Tobin J (1965) “Money and Economic Growth”, Econometrica, 33, 671-84.
Published
2003-10-11
How to Cite
Drake, L., Mullineux, A., & Agung, J. (2003). INCORPORATING RISKY ASSETS IN DIVISIA MONETARY AGGREGATES. Buletin Ekonomi Moneter Dan Perbankan, 3(1), 98-120. https://doi.org/10.21098/bemp.v3i1.289
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
