Publications » The Demand for Assets and Optimal Monetary Aggregation
The Demand for Assets and Optimal Monetary Aggregation
Abstract
This paper uses a highly disaggregated demand system to estimate the
degree of substitutability among monetary assets and to address the issue of
optimal monetary aggregation in the United States. We address the problems
of dimensionality and nonlinearity, estimating a very detailed monetary asset
demand system encompassing the full range of assets based on the locally
exible normalized quadratic (NQ) expenditure function. We treat the con-
cavity property as a maintained hypothesis and provide evidence consistent
with neoclassical microeconomic theory. Statistical tests reject the appropri-
ateness of the aggregation assumptions for all the money measures published
by the Federal Reserve as well as for a large number of groupings suggested
by earlier studies. This supports and reinforces Barnetts (2016) assertion
that we should employ the broadest M4 monetary aggregate published by
the Center for Financial Stability.