The Case for Divisia Monetary Statistics: A Bayesian Time-Varying Approach

28 Pages Posted: 2 Dec 2016 Last revised: 26 Oct 2018

Date Written: October 23, 2018

Abstract

The zero lower bound and quantitative easing policies have rekindled interest in the link between monetary aggregates and the business cycle. This paper argues, on the basis of Bayesian time-varying coefficient VAR models that use Divisia indexes, that money is more closely linked to the business cycle, as well as forecasting economic activity more accurately, than existing literature claims. Moreover, the relationship between money and economic activity is considerably more pronounced during periods of economic distress, such as in the Great Recession.

Keywords: Time-varying Parameter VAR, Frequency Domain, Divisia Index, Monetary Policy

JEL Classification: E32, E47, E51, E52, E58

Suggested Citation

Ellington, Michael, The Case for Divisia Monetary Statistics: A Bayesian Time-Varying Approach (October 23, 2018). Journal of Economic Dynamics and Control, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2878077 or http://dx.doi.org/10.2139/ssrn.2878077

Michael Ellington (Contact Author)

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

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