Identifying Monetary Policy Shocks with Divisia Money in the United Kingdom

40 Pages Posted: 1 Dec 2023

See all articles by Jane M. Binner

Jane M. Binner

University of Birmingham - Department of Accounting and Finance

Rakesh Bissoondeeal

Aston University - Aston Business School

Barry E. Jones

SUNY at Binghamton - Department of Economics

Victor Valcarcel

University of Texas at Dallas

Date Written: November 24, 2023

Abstract

We construct a quarterly Divisia measure for households and private non-financial
corporations and a corresponding dual user cost measure for the UK. Our construction
of both the aggregate and its price dual facilitates an investigation of several structural
vector autoregresssion (SVARs) for the UK, of the type of non-recursive identifications
examined by Belongia and Ireland (2016), Belongia and Ireland (2018), as well as
the block triangular specification that Keating et al. (2019) recently investigated for
the U.S. We extend these approaches for the UK and advance a novel non-recursive
identification of our own. Structures that consider Bank Rate or the Wu and Xia
(2016) shadow rate as the monetary policy indicator for the UK obtain persistent
price puzzles. In contrast, we find that exogenous contractions in Divisia balances
yield sensible responses in various specifications with Divisia money as the indicator
variable

Keywords: Divisia, money supply, user costs, monetary policy, money demand, United Kingdom, structural VAR

JEL Classification: E3, E4, E5

Suggested Citation

Binner, Jane M. and Bissoondeeal, Rakesh and Jones, Barry E. and Valcarcel, Victor, Identifying Monetary Policy Shocks with Divisia Money in the United Kingdom (November 24, 2023). Available at SSRN: https://ssrn.com/abstract=4643018 or http://dx.doi.org/10.2139/ssrn.4643018

Jane M. Binner

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham, B15 2TY
United Kingdom

Rakesh Bissoondeeal

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Barry E. Jones

SUNY at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

Victor Valcarcel (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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