Interest Rates, Money, and Economic Activity

In this paper, we are motivated by the fact that little is known about the relative performance of broad and narrow Divisia monetary aggregates, and by recent work that tests and rejects the appropriateness of the aggregation assumptions that underlie the various monetary aggregates published by the Federal Reserve as well as a large number of monetary asset groupings suggested by earlier studies. We present a comprehensive comparison of narrow versus broad Divisia monetary aggregates within three classes of empirical models. We compute correlations between the cyclical components of Divisia monetary aggregates at different levels of aggregation and the cyclical component of industrial production. We test for Granger causality running from the Divisia aggregates to industrial production and various other measures of real economic activity. We also reestimate a structural VAR based on earlier work by Leeper and Roush (2003) and Belongia and Ireland (2015, 2016), modifying that earlier work by using monthly rather than quarterly data and extending it, both by using broad as well as narrower Divisia monetary aggregates and by allowing for GARCH behavior in the structural shocks