An Empirical Analysis of M4 in the United Kingdom

Bank of England Working Paper No. 21

Posted: 6 Nov 2003


This paper presents some econometric modelling of M4 balances. It extends earlier Bank research on M4 by looking separately at personal and corporate holdings of money, and applies some recent advances in econometric methodology.

The results confirm the importance of sectoral analysis. The results are especially encouraging for the personal sector where a significant role is found for wealth, interest rates and inflation. More surprising is the finding that simultaneous estimation of money demand and a consumption function improves both specification - the dynamic interaction of money and consumption may have an important role to play in explaining the recent behaviour of both variables.

Corporate sector analysis is more problematic. The analysis and empirical results both suggest that interest rates must be explained simultaneously with corporate sector M4 balances. But no stable model of interest rates is found. Nevertheless a relatively simple model can be estimated for corporate sector M4.

The results suggest that the effects of financial liberalisation can be captured by a combination of wealth and interest rate differentials. To the extent that wealth/income ratios become more stable, M4 velocity may also stabilise in the future.

JEL Classification: E51

Suggested Citation

Fisher, Paul and Vega, Juna, An Empirical Analysis of M4 in the United Kingdom. Bank of England Working Paper No. 21, Available at SSRN:

Paul Fisher

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Juna Vega

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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