Identifying monetary policy shocks with Divisia money in the United Kingdom

Jane M. Binner; Rakesh Bissoondeeal; Barry E. Jones; Victor J. Valcarcel

doi:10.1017/S1365100524000749

Identifying monetary policy shocks with Divisia money in the United Kingdom

Jane M. Binner
, Rakesh Bissoondeeal
, Barry E. Jones
, Victor J. Valcarcel

Economics and International Business

University of Birmingham
State University of New York at Binghamton
Aston University
University of Texas at Dallas

Research output: Contribution to journal › Article › peer-review

1 Citation (SciVal)

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Abstract

We construct a Divisia money measure for U.K. households and private non-financial corporations and a corresponding dual user cost index employing a consistent methodology from 1977 up to the present. Our joint construction of both the Divisia quantity index and the Divisia price dual facilitates an investigation of structural vector autoregresssion models (SVARs) over a long sample period of the type of non-recursive identifications explored by Belongia and Ireland (2016, 2018), as well as the block triangular specification advanced by Keating et al. (2019). An examination of the U.K. economy reveals that structures that consider a short-term interest rate to be the monetary policy indicator generate unremitting price puzzles. In contrast, we find sensible economic responses in various specifications that treat our Divisia measure as the indicator variable.

Original language	English
Article number	e86
Pages (from-to)	1-29
Number of pages	29
Journal	Macroeconomic Dynamics
Volume	29
Early online date	31 Mar 2025
DOIs	https://doi.org/10.1017/S1365100524000749
Publication status	Published - 31 Mar 2025

Bibliographical note

Copyright © The Author(s), 2025. Published by Cambridge University Press. This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives licence (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided that no alterations are made and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use and/or adaptation of the article.

Keywords

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

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10.1017/S1365100524000749Licence: CC BY-NC-ND 4.0

JM Binner et al_identifying-monetary-policy-shocks-with-divisia-money-in-the-united-kingdom
Copyright © The Author(s), 2025. Published by Cambridge University Press. This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives licence (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided that no alterations are made and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use and/or adaptation of the article.
Final published version, 1.08 MBLicence: CC BY-NC-ND 4.0

Cite this

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title = "Identifying monetary policy shocks with Divisia money in the United Kingdom",

abstract = "We construct a Divisia money measure for U.K. households and private non-financial corporations and a corresponding dual user cost index employing a consistent methodology from 1977 up to the present. Our joint construction of both the Divisia quantity index and the Divisia price dual facilitates an investigation of structural vector autoregresssion models (SVARs) over a long sample period of the type of non-recursive identifications explored by Belongia and Ireland (2016, 2018), as well as the block triangular specification advanced by Keating et al. (2019). An examination of the U.K. economy reveals that structures that consider a short-term interest rate to be the monetary policy indicator generate unremitting price puzzles. In contrast, we find sensible economic responses in various specifications that treat our Divisia measure as the indicator variable.",

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N1 - Copyright © The Author(s), 2025. Published by Cambridge University Press. This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives licence (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided that no alterations are made and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use and/or adaptation of the article.

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N2 - We construct a Divisia money measure for U.K. households and private non-financial corporations and a corresponding dual user cost index employing a consistent methodology from 1977 up to the present. Our joint construction of both the Divisia quantity index and the Divisia price dual facilitates an investigation of structural vector autoregresssion models (SVARs) over a long sample period of the type of non-recursive identifications explored by Belongia and Ireland (2016, 2018), as well as the block triangular specification advanced by Keating et al. (2019). An examination of the U.K. economy reveals that structures that consider a short-term interest rate to be the monetary policy indicator generate unremitting price puzzles. In contrast, we find sensible economic responses in various specifications that treat our Divisia measure as the indicator variable.

AB - We construct a Divisia money measure for U.K. households and private non-financial corporations and a corresponding dual user cost index employing a consistent methodology from 1977 up to the present. Our joint construction of both the Divisia quantity index and the Divisia price dual facilitates an investigation of structural vector autoregresssion models (SVARs) over a long sample period of the type of non-recursive identifications explored by Belongia and Ireland (2016, 2018), as well as the block triangular specification advanced by Keating et al. (2019). An examination of the U.K. economy reveals that structures that consider a short-term interest rate to be the monetary policy indicator generate unremitting price puzzles. In contrast, we find sensible economic responses in various specifications that treat our Divisia measure as the indicator variable.

KW - Divisia

KW - money supply

KW - user costs

KW - monetary policy

KW - money demand

KW - United Kingdom

KW - structural VAR

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JO - Macroeconomic Dynamics

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M1 - e86

ER -

Identifying monetary policy shocks with Divisia money in the United Kingdom

Abstract

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Keywords

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