Does Liquidity Matter? Properties of a Divisia Monetary Aggregate in the Euro Area*
| Published date | 01 July 2004 |
| Author | Livio Stracca |
| DOI | http://doi.org/10.1111/j.1468-0084.2004.00081.x |
| Date | 01 July 2004 |
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Does Liquidity Matter? Properties of a Divisia
Monetary Aggregate in the Euro Area*
Livio Stracca
European Central Bank Frankfurt an Mein, Germany (e-mail: livio.stracca@ecb.int)
Abstract
This paper builds a quarterly Divisia monetary aggregate for the euro area
using area-wide data over the sample period from 1980 to 2000, finding two
main results. First, it is found that the demand for this monetary aggregate has
been well behaved and relatively stable over the last two decades. Secondly,
the Divisia-weighed monetary aggregate is found to have interesting
information content from a forward-looking perspective. This lends support
to the view that money and – in a broader sense – liquidity services should be
assigned an important role in shaping monetary policy in the euro area,
although the policy maker is not interested in monetary aggregates per se.
I. Introduction
Divisia monetary aggregates have received considerable attention in the
theoretical literature because of their strong foun
´dations in aggregation theory
(Barnett, 1980). Under fairly general assumptions, they represent the ideal
aggregate measure of ‘liquidity services’ available in the economy and are
therefore potentially of great interest to monetary policy makers aiming at
maintaining price stability (Mullineux, 1996). Central banks and academics
have attempted to construct proxies for Divisia-weighted monetary aggregates
and to evaluate their econometric properties, often comparing them with those
of their simple sum counterparts. Policy makers have sometimes used such
*I thank the editor and a referee for their suggestions, and several colleagues at the ECB for useful
comments. I am particularly grateful to Bill Barnett for comments which greatly improved the quality
of the paper. The views expressed in this paper are only of the author and are not necessarily shared
by the European Central Bank.
JEL Classification numbers: E41, E52.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 66, 3 (2004) 0305-9049
309
Blackwell Publishing Ltd, 2004. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA.
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