url
19
Jan
2014

Empirical Performance of Monetary Aggregates in BEAC and BCEAO: Empirical Literature

Empirical Performance of Monetary Aggregates in BEAC and BCEAO: Empirical LiteratureFollowing the seminal work of Barnett, many studies have examined the usefulness of Divisia monetary aggregates in the conduct of monetary policy especially in developed countries. Cockerline and Murray compare Divisia with simple sum aggregates for Canada and conclude that Divisia aggregates display greater parameter stability. Barnett et al show that Divisia money velocity M3 is more stable than the other monetary indicators in the USA within the period 1968-1978. In another study, these authors use many criteria (stability of demand function, controllability of money supply, causality between money and income) to compare Divisia monetary aggregates and traditional ones. With regard to the criteria aforementioned, Barnett et al find that none of monetary aggregates have better empirical performances. However, the study demonstrates that at the high level of aggregation, Divisia monetary aggregates are better than simple sum in the conduct of monetary policy. This result is confirmed by Spindt. Ishida concludes that Divisia M2 should be considered along with the simple-sum aggregates in conducting monetary policy. Reviewing european life

Serletis and King conclude that Divisia aggregates are potentially more useful than simple-sum aggregates for forecasting nominal income. In UK, Belongia and Chrystal demonstrate that Divisia monetary aggregates are more closely related to the growth of nominal GDP, and have stable money demand functions. Swofford and Whitney emphasis that Divisia monetary aggregates forecast better the evolution of inflation within the period 1970- 1985 in USA. The empirical superiority of Divisia monetary aggregates is also found by Schunk, Dahalan et al, Darrat et al.
Some studies produce mixed results. Fluri and Spoerndli find that Divisia M1 predicts short-run price movements better than simple sum M1 but does not predict long-run price movements more accurately. Lecarpentier and Renou study the properties of Divisia monetary aggregate M3 compared to the simple-sum monetary aggregate M3 from 1982 to 1997. They conclude that the result of causality between money and income are very close for the two monetary aggregates. By, looking at the information content, the superiority of Divisia monetary aggregate is confirmed. Along the same line, Elger et al demonstrate that the aggregation method has no significative impact on inflation and growth forecasting.
The principal drawback coming from the existing literature is the quasi absence of studies concerning CFA franc Zone (FZC) countries. Otherwise, the majority of studies comparing the simple sum and Divisia monetary aggregates consider their relative in sample performance using alternative models except the studies of Barnett et al, Swofford and Whitney, and Schunk which focus on out-of-sample forecasting. The main innovation of the paper is that we evaluate the empirical performances of alternative monetary aggregates using both in- sample and out-of-sample forecasting.

Following the seminal work of Barnett, many studies have examined the usefulness of Divisia monetary aggregates in the conduct of monetary policy especially in developed countries. Cockerline and Murray compare Divisia with simple sum aggregates for Canada and conclude that Divisia aggregates display greater parameter stability. Barnett et al show that Divisia money velocity M3 is more stable than the other monetary indicators in the USA within the period 1968-1978. In another study, these authors use many criteria (stability of demand function, controllability of money supply, causality between money and income) to compare Divisia monetary aggregates and traditional ones. With regard to the criteria aforementioned, Barnett et al find that none of monetary aggregates have better empirical performances. However, the

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Kevin J. Brandon

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