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
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: Suggested Citation