Divisia aggregation and substitutability among monetary assets

Deskripsi

Investigates the substitutability between Canadian monetary assets and compares the empirical performance of Divisia and simple-sum monetary aggregates. The study employs a quasi-homothetic translog demand system to analyze consumer preferences, relaxing the restrictive assumption of homotheticity and allowing for more flexible Engel curves. The authors highlight the limitations of simple-sum aggregation, which assumes perfect substitutability among monetary assets, and advocate for Divisia aggregation, which aligns with economic theory by weighting assets based on their user costs.

The results support Divisia aggregation, as it better captures the underlying economic relationships and provides more reliable policy insights. This work contributes to the ongoing debate on monetary aggregation and its implications for monetary policy and economic stability.