Divisia Monetary Aggregates, Macroeconomic Shocks, and Economic Fluctuations
Date
2022-03
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
This dissertation consists of three chapters. The first chapter examines the relative information content of Divisia measures of money and interest rates in explaining key macroeconomic variations and provides a comparison between narrow and broad Divisia measures of money. Using three classes of empirical models, and monthly data from 1967 to 2018, the chapter shows that broad Divisia money measures are weakly procyclical and relatively more informative for predicting economic activities than the acyclical narrow money measures. Together with a SVAR-GARCH (1,1) analysis, the chapter concludes that broad Divisia monetary aggregates are superior to their narrow counterparts in terms of their ability to predict real economic activities and to transmit shocks within the US economy. The second chapter provides a comparative analysis of the relative importance of uncertainty, monetary policy, and leverage shocks in affecting business cycle fluctuations. According to the information-based monetary misperceptions model, monetary shocks are a principal source of business cycles. Recently, some researchers have alluded to uncertainty shocks as alternative drivers of business cycle fluctuations. This chapter assesses the predictive ability of various risk/uncertainty measures in predicting real economic activities and finds that the macroeconomic uncertainty index and the Chicago Fed national financial conditions risk index have the strongest predictive relationship with the economy. Using a penalty function approach to identify three shocks, the chapter concludes that uncertainty shocks are a relatively more important source of variations in the economy than traditional monetary policy shocks. However, monetary policy shocks still outperform uncertainty shocks in explaining inflation dynamics. The final chapter focuses on the role of money supply and leverage in monetary policy and business cycle analysis. Both leverage and the money supply affect the level of economic activity and the business cycle. Yet these variables are mostly not directly considered as key variables in recent monetary and business cycle analysis. Augmenting the standard Taylor type reaction function of the central bank with measures of money and leverage, this chapter provides a comprehensive comparison of the effects of monetary policy shocks in an economy where the reaction function follows the standard Taylor rule and one that augments it with money and leverage. The identification is based on sign restrictions and other useful prior information of the researcher. This chapter finds that contractionary monetary policy is 2 to 3 times more effective in the augmented model.
Description
Keywords
Divisia monetary aggregates, Broad money, Uncertainty, Monetary policy, Leverage, Output, Inflation
Citation
Dery, C. B. D. (2022). Divisia monetary aggregates, macroeconomic shocks, and economic fluctuations (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.