Title: Monetary aggregation theory and nominal GDP targeting

Authors: William A. Barnett; Liting Su

Addresses: University of Kansas, Lawrence and Centre for Financial Stability, NY City, USA ' Centre for Financial Stability, 1120 Avenue of the Americas, 4th Floor, New York, NY 10036, USA

Abstract: We investigate bivariate time series properties of Divisia money and nominal GDP to investigate the viability of recent proposals advocating a role for a Divisia monetary aggregate in nominal GDP targeting. There are two particularly relevant proposals: 1) the proposal by Barnett, Chauvet and Leiva-Leon (2015) to use a Divisia monetary aggregate as an indicator in the monthly Nowcasting of nominal GDP, as needed in implementation of any nominal GDP targeting policy; 2) the proposal by Belongia and Ireland (2015) to use a Divisia monetary aggregate as an intermediate target, with nominal GDP being the final target of policy. We run well known diagnostic tests of bivariate time series properties of the Divisia M2 and nominal GDP stochastic processes. Those tests are for properties that are necessary, but not sufficient, for the conclusions of Belongia and Ireland (2014) and Barnett et al. (2015). We find no time series properties that would contradict those implied by either of those two approaches.

Keywords: money; aggregation theory; index number theory; Divisia index; Divisia monetary aggregates; nominal GDP targeting.

DOI: 10.1504/IJBG.2019.10021965

International Journal of Business and Globalisation, 2019 Vol.22 No.4, pp.490 - 505

Received: 04 Jan 2017
Accepted: 30 Jun 2017

Published online: 21 Jun 2019 *

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