The money multiplier, simple sum, Divisia and innovation-Divisia monetary aggregates: Cointegration tests for the UK

The possibility is investigated of establishing a cointegrating relationship between various competing monetary aggregates and a high-powered money base for the UK, 1977-1994. The aggregates are constructed from the Bank of England's M4. Cointegrating equations are found for all aggregates; with little to choose between them; and Divisia being at least as good as its simple sum counterpart. The ECM/causality results are not as promising; though they all suggest that high-powered money is weakly exogenous. The simple sum provides the best dynamic results, closely followed by the Divisia adjusted for implicit interest payments on cheque accounts.