Divisia monetary aggregates for a heterogeneous euro area
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Divisia monetary aggregates for a heterogeneous euro area Maximilian C. Brill1 · Dieter Nautz2 · Lea Sieckmann2
© The Author(s) 2020
Abstract Since the run-up to the great recession, there has been a significant degree of heterogeneity across euro area countries both in terms of interest rates and in the composition of monetary assets. In order to account for the heterogeneity of monetary assets within and across member countries, we propose a Divisia monetary aggregate for the euro area. In line with earlier evidence obtained for the United States, our results from a panel probit analysis show that the divergence between the Divisia and the simple sum aggregate has a significant predictive content for recessions in euro area countries. Keywords Monetary aggregation · Euro area Divisia aggregate · Recessions JEL Classification E51 · E32 · C43
1 Introduction The role of money for monetary policy analysis has changed remarkably in recent years. In the early years of the European Monetary Union, for example, the European Central Bank (ECB) placed a lot of emphasis on the role of monetary We thank two referees for their very helpful comments. We are also grateful for suggestions received by seminar participants at the European Central Bank, at the annual meeting of the Society for Economic Measurement (SEM) in Frankfurt and the 6th International Conference on Time Series and Forecasting (ITISE) in Granada. * Dieter Nautz dieter.nautz@fu‑berlin.de Maximilian C. Brill [email protected] Lea Sieckmann l.sieckmann@fu‑berlin.de 1
Department of Economics, University of Antwerp, Prinsstraat 13, 2000 Antwerp, Belgium
2
Department of Economics, Freie Universität Berlin, Boltzmannstrasse 20, 14195 Berlin, Germany
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Empirica
aggregates for its monetary policy analysis. The ECB even published a reference value for money growth in order to explain its interest rate decisions. Yet, this prominent role of money has never been beyond controversy. On the one hand, the empirical literature raised doubts on the stability of money demand and, thus, on the information content of monetary aggregates for inflation and output. On the other hand, the theoretical literature assumed that monetary policy is fully reflected in interest rates and money virtually disappeared from standard macro models. In accordance with the declining role of money for both, monetary theory and monetary policy practice, the ECB downplayed the role of monetary aggregates for its interest rate decisions, see e.g. European Central Bank (2003) or Constâncio (2018). Since the outbreak of the financial crisis, there has been a renewed interest in the analysis of monetary aggregates. To illustrate, Billi et al. (2020) reconsider money growth targeting as a monetary policy tool in the current low-interest-rate environment. However, traditional simple sum aggregates may not accurately measure the quantities of monetary services and the availability of liquidity. Following Barnett (1980), monetary analysis should be based on Divi
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