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Barry E. Jones

22 December 2006
WORKING PAPER SERIES - No. 704
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Abstract
We propose a numerical test of the non-parametric conditions for additive separability between consumption and real money balances, building on Varian (1983). If additive separability is rejected, then real balances enter into the theoretical IS curve. We test whether or not monetary assets and consumption are additively separable for the euro area using quarterly data from 1991 to 2005. Previous results using a parametric approach suggest that real balances can be excluded from the IS curve. We find that additive separability is violated over this sample period. After 1992, however, violations involve only a few observations and are in some instances related to measurement problems in the data. Overall, our results tend to support the claim that perfect non-separability between consumption and real balances is implausible, but that non-separabilities may not be very important empirically. At the same time, we reject additive separability throughout if we extend the sample period back to the 1980s, a period characterised by higher volatility in inflation and money growth.
JEL Code
C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General
C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
23 June 2008
WORKING PAPER SERIES - No. 904
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Abstract
Narrow and broad money measures (including Divisia aggregates) have been found to have explanatory power for UK output in backward-looking specifications of the IS curve. In this paper, we explore whether or not real balances enter into a forward-looking IS curve for the UK, building on the theoretical framework of Ireland (2004). To do this, we test for additive separability between consumption and money over a sizeable part of the post-ERM period using non-parametric methods. If consumption and money are not additively separable, then real money balances enter into the forward-looking IS curve (the converse does not hold, however). A main finding is that the UK data seem to be broadly consistent with additive separability for the the more recent period from 1999 to 2007.
JEL Code
C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General
C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money