Inferences about the effects of money on economic activity may depend importantly on the choice of a monetary index because simple-sum aggregates cannot internalize pure substitution effects. This hypothesis is investigated by replicating five recent studies that have challenged an aspect of the "conventional wisdom" about the effects of money on aggregate activity. In four of the five cases, the qualitative inference in the original study is reversed when a simple-sum monetary aggregate is replaced by a Divisia index of the same asset collection. The results are mixed in the fifth case.

Inferences about the effects of money on economic activity may depend importantly on the choice of a monetary index because simple-sum aggregates cannot internalize pure substitution effects. This hypothesis is investigated by replicating five recent studies that have challenged an aspect of the "conventional wisdom" about the effects of money on aggregate activity. In four of the five cases, the qualitative inference in the original study is reversed when a simple-sum monetary aggregate is replaced by a Divisia index of the same asset collection. The results are mixed in the fifth case.

This paper evaluates the performance of a monetary aggregate that is constructed from principles of economic and index number theory. Results from tests for weak separability indicate that wholesale deposits should not be aggregated with other U.K. financial assets; they currently are included, however, in broad monetary aggregates published by the Bank of England. Financial asset groupings passing the weak separability tests then were aggregated using both simple-sum and Divisia weights. In each case, the Divisia aggregates were more closely related to the growth of nominal GDP and had stable demand for money functions. Copyright 1991 by MIT Press. (This abstract was borrowed from another version of this item.)

Interest-bearing checkable deposits are examined to test whether they should be included in measures of the U.S. money stock. Both Divisia and traditional simple-sum aggregates are constructed on the basis of tests for weak separability in a model of the demand for financial assets. Using nonparametric demand analysis, we find that several groups of assets are compatible with aggregation theory. We find empirical support for a narrow measure consisting of the components of current MIA. In tests based on a St. Louis equation and in terms of controllability, a Divisia aggregate performs better than the simple-sum MIA measure.

Interest-bearing checkable deposits are examined to test whether they should be included in measures of the U.S. money stock. Both Divisia and traditional simple-sum aggregates are constructed on the basis of tests for weak separability in a model of the demand for financial assets. Using nonparametric demand analysis, we find that several groups of assets are compatible with aggregation theory. We find empirical support for a narrow measure consisting of the components of current MIA. In tests based on a St. Louis equation and in terms of controllability, a Divisia aggregate performs better than the simple-sum MIA measure.

Michael T. Belongia, R. W. Hafer, Richard G. Sheehan, On the Temporal Stability of the Interest Rate-Weekly Money Relationship, The Review of Economics and Statistics, Vol. 70, No. 3 (Aug., 1988), pp. 516-520