The choice of appropriate monetary aggregates in the United Kingdom

Abstract

This paper re-examines the relationship between alternative monetary aggregates (M0 and M4) and other macroeconomic variables in the United Kingdom. The results of a five-variable VAR analysis are indicative of bidirectional causality between each of the monetary aggregates and real output. Our findings of a feedback relationship between M0-real income, and M4-real income makes each of the monetary aggregates a poor intermediate target variable. Moreover, contrary to most research work in this area, we find a feedback relationship between M0 and prices which appears to support the monetary accomodation hypothesis.