Money demand, Divisia aggregate and share price volatility in the UK

Please cite the paper as:
Rakesh Bissoondeeal, Jane Binner, (2018), Money demand, Divisia aggregate and share price volatility in the UK, World Economics Association (WEA) Conferences, No. 1 2018, Monetary Policy after the Global Crisis, 19th February to 20th April, 2018

Abstract

We investigate (i) the performance of the weighted monetary aggregate, Divisia, relative to its official Simple Sum counterpart in a money demand framework, and (ii) the impact of share prices and their volatility on these aggregates. We find that the Divisia aggregate shows more stability with monetary policy targets, such as output, than its counterpart, particularly during the financial crisis and beyond. We also find that the influence of share prices and their volatility on monetary aggregates have increased in the recent decades. We also uncover that as share prices increase, investors tend to increase their holdings of more savings oriented assets but they also switch from low interest yielding highly liquid assets into equities.

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  • monetarypolicyconferenceadmin says:

    A very good idea and extremely good way of presenting things. Maybe could be interesting to expand this to the rare disasters models and asset pricing.

  • Ryan Mattson says:

    “We also uncover that as share prices increase, investors tend to increase their holdings of more savings oriented assets but they also switch from low interest yielding highly liquid assets into equities.”

    I really think you should look at the US Divisia M4 and consider an extension, specifically looking at the period of 2006 to 2010 and the most recent data starting in 2017 with the interest rate rises. Expenditure share on the broad components (commercial paper, short term bills, repos) dropped as these user costs did, while the share of savings great larger.

    Expenditure shares and weights should be available from the CFS website.