Admissible monetary aggregates for the euro area

Jane M. Binner, Rakesh Bissoondeeal, C. Thomas Elger, Barry E. Jones, Andrew W. Mullineaux

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Abstract

We use the Fleissig and Whitney [Fleissig, A.R., Whitney, G.A., 2003. A new PC-based test for Varian's weak separability conditions. Journal of Business and Economics Statistics 21 (1), 133–144] weak separability test to determine admissible levels of monetary aggregation for the Euro area. We find that the Euro area monetary assets in M2 and M3 are weakly separable and construct admissible Divisia monetary aggregates for these assets. We show that real growth of the admissible Divisia aggregates enters the Euro area IS curve positively and significantly for the period from 1980 to 2005. Out of sample, we show that Divisia M2 and M3 appear to contain useful information for forecasting Euro area inflation.
Original languageEnglish
Pages (from-to)99-114
Number of pages16
JournalJournal of International Money and Finance
Volume28
Issue number1
DOIs
Publication statusPublished - Feb 2009

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Keywords

  • weak separability tests
  • IS curve
  • euro area
  • divisia aggregates
  • forecasting

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