COMPARISON OF SIMPLE SUM AND DIVISIA MONETARY AGGREGATES USING PANEL DATA ANALYSIS

Year 2009, Volume: 1 Issue: 2, 1 - 13, 01.12.2009

Sadullah Celik Seda Uzun

Abstract

It is well documented that financial innovation has led to poor performance of simple sum method of monetary aggregation destabilizing the historical relationship between monetary aggregates and ultimate target variables like rate of growth and rate of unemployment during the liberalization period of 1980s. This study tries to emphasize the superiority of an alternative method of aggregation over the simple sum method, namely Divisia monetary aggregates, employing panel data analysis for United States, United Kingdom, Euro Area and Japan for the period between 1980Q1 and 1993Q3. After investigating the order of stationarity of the panel data set through several panel unit root tests, we perform advanced panel cointegration tests to check the existence of a long run link between the Divisia monetary aggregates and income and interest rates in a simple Keynesian money demand function

Keywords

Divisia, Simple Sum, Monetary Aggregation, Panel Cointegration

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