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Economics Letters
journal homepage: www.elsevier.com/locate/ecolet
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Article history:
Received 15 April 2015
Received in revised form
25 May 2015
Accepted 30 May 2015
Available online 9 June 2015
abstract
We create a euro-area Divisia-money dataset and estimate theoretically correct responses to money, user
cost and interest rate shocks using structural vector-autoregressions. Our findings suggest that money
matters for output, prices and interest rates, while the European Central Bank can influence monetary
developments.
2015 Elsevier B.V. All rights reserved.
JEL classification:
C32
C82
E51
E58
Keywords:
Divisia
Monetary aggregation
Monetary policy
Structural VAR
1. Introduction
Money has a minor role in monetary policy and macroeconomic modelling. One important cause for this disregard is empirical: estimated money demand functions have been found to be
unstable and money has proved to be less effective in predicting
economic outcomes.1 However, such empirical failures are chal-
Correspondence to: Bruegel, Rue de la Charit 33, Brussels, 1210, Belgium. Tel.:
+32 2 227 4211; fax: +32 2 227 4219.
E-mail addresses: zsolt.darvas@bruegel.org, darvas.zsolt@krtk.mta.hu,
zsolt.darvas@uni-corvinus.hu.
1 Other reasons include policy shifts by central banks to focus on interest rates
and the development of theories suggesting that money is redundant (Leeper and
Roush, 2003; Belongia and Ireland, 2015; Keating et al., 2014).
http://dx.doi.org/10.1016/j.econlet.2015.05.034
0165-1765/ 2015 Elsevier B.V. All rights reserved.
124
125
Fig. 1. Impulse responses to interest rate and money shocks. Note. Solid line: estimated impulseresponse function; dashed lines: 95 percent confidence band. The horizontal
axis indicates the number of quarters after the shock.
liquidity effect, interest rates increase after a money shock, suggesting that the ECB reacted to developments in money aggregates.
We also find that Divisia-money declines after a shock to user cost,
consistently with a money-demand function, while an interest rate
shock increases user cost and decreases Divisia-money, suggesting
that the ECB can influence monetary developments. Most of these
results are not significant when we use simple-sum measures of
money. Therefore, our findings for the euro area complement the
evidence from US data that Divisia monetary aggregates are useful in assessing the impacts of monetary policy and that they work
better in SVAR models than simple-sum measures of money.
Acknowledgments
I am thankful to an anonymous referee, Barry E. Jones, participants at Bruegel and Hungarian Academy of Sciences seminars and
the 3rd ECOBATE Conference for useful comments, and to Pia Httl
and Thomas Walsh for research assistance.
Appendix A. Supplementary data
Supplementary material related to this article can be found
online at http://dx.doi.org/10.1016/j.econlet.2015.05.034.
126
Fig. 1. (continued)
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