Home > Data, Monetary Policy > Follow the (Divisia) Money

Follow the (Divisia) Money

It was very good to see some monetarist analysis in the UK media this week – Ed Conway reported that “Households Raid Savings At Record Rate” for Sky News, and followed this with a blog post.  The “raid” is actually a switch from long to short-term deposit accounts, which started mid-2012, as Ed’s graph shows.

Though the traditional broad money aggregates are growing steadily and at “decent” rates (M4ex at 4-5% this year), this shift towards liquidity naturally has a more profound impact on the Divisia indices.  I would treat this more as an indicator of current monetary conditions; Duncan Brown has a very nice post earlier this year exploring the relation between UK monetary aggregates and nominal spending in great detail.

Here, anyway, is the current state of the data, showing M4ex, household divisia and nominal spending:

UK Money and Nominal Spending

UK Money and Nominal Spending. Source: BoE M4ex, Household divisia, ONS YBHA

Categories: Data, Monetary Policy
  1. W. Peden
    December 7, 2013 at 17:26

    It’s good to see the monetary aggregates back in line with what is needed for NGDP growth in the 4-6% range. As interest rates rise, we’ll probably see velocity fall.

    For the first time in a long while, I don’t think there’s an easy case for a more expansive monetary policy, though I also don’t think there’s any sort of case for a more contractionary monetary policy. I’d say we’re looking at soon getting Great Moderation-style NGDP growth.

    Imagine if we’d had this kind of monetary policy back in 2011? Then, we’d probably be seeing interest rate rises and some better returns on our savings than now…

    • December 9, 2013 at 14:55

      Exactly: finally, Divisia growth is where it should be. ‘Momentum’ is an overused metaphor in economics, but this is surely it. While in the longer term, we probably want to see growth closer to the 6%-8% range, there’s no reason to think an initial period of more rapid catch-up growth is a problem, as firms and households rebalance their portfolios in anticipation of improved future trends.

      The post you (Britmouse) link to was from some background work I did for my MSc dissertation, where I got reasonable results for a Divisia-NGDP model, adding in 10 year rates, stock prices and exchange rates (house prices were a bit of a problem). I might do another post or two on it, but basically Divisia is the only aggregate where the model stacks up with causation running from money to spending. Trying to model with M4 captures a lot of noise from rate changes, which Divisia clears up by taking account of liquidity. Given lasting stable inflation, the straight money-income relationship is more difficult to identify because other sources of instability become much more noticeable; Divisia helps to see past some of them.

  2. James in London
    December 9, 2013 at 20:49

    The immediate cause of this switch is the ongoing collapse in rates on term savings accounts, seen in the rates tab of the BoE spreadsheet that supplies this data. Equally, the fall in divisia money growth in 2008 would have been caused by the dramatic bidding war between banks for term deposits. Now, depositors are largely indifferent between current account and term savings due to the minimal return difference.

    The effect is to tempt people to spend more, but I think confidence leads spending rather than the “push” effect of lower term savings rates.

    • December 9, 2013 at 22:40

      James – I’d love to see that 2008 narrative fleshed out. Thinking about this more, it is somewhat counter-intuitive. I might have expected to see the data moving in the opposite direction if anything… it is weird to see Ed Conway’s graph with households in aggregate *dumping liquidity*, through 2008/9. This is supposed to be a liquidity trap where everybody hoards money!

  1. December 9, 2013 at 13:53

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