New Indices of Money Supply and the Flexible Laurent Demand System

Abstract

The article begins by surveying the existing results on the new Divisia monetary aggregates. Charts display the differences in behavior between the Divisia aggregates and the Federal Reserve's official simple-sum monetary aggregates. The article then compares system-wide fit for the simple-sum and Divisia monetary aggregates when used as data in the joint estimation of a system of demand equations. The demand system is derived from a new Laurent expansion approximation to the reciprocal indirect utility function. The Laurent expansion provides a better-behaved remainder term than that of the more commonly used Taylor series. The results favor the Divisia aggregates.

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