The Use of Divisia Monetary Aggregates in Nominal GDP Targeting

One of the hottest topics in monetary policy research has been the revival of the proposal for “nominal GDP targeting.” Recent research has emphasized the potential importance of the Divisia monetary aggregates in implementing that policy. We investigate bivariate time series properties of Divisia money and nominal GDP to investigate the viability of recent proposals by authors who advocate a role for a Divisia monetary aggregate in nominal GDP targeting. There are two particularly relevant proposals: (1) the proposal by Barnett, Chauvet, and Leiva-Leon (2015) to use a Divisia monetary aggregate as an indicator in the monthly Nowcasting of nominal GDP, as needed in implementation of any nominal GDP targeting policy; and (2) the proposal by Belongia and Ireland (2015) to use a Divisia monetary aggregate as an intermediate target, with nominal GDP being the final target of policy. We run well known diagnostic tests of bivariate time series properties of the Divisia M2 and nominal GDP stochastic processes. Those tests are for properties that are necessary, but not sufficient, for the conclusions of Belongia and Ireland (2014) and Barnett, Chauvet, and Leiva-Leon (2015). We find no time series properties that would contradict those implied by either of those two approaches.