Divisia monetary aggregates for Brazil

Abstract

Herein we review the methodology for constructing monetary aggregates using Divisia weights. Divisia monetary aggregates (M2, M3, and M4) were then calculated with both monthly and quarterly data for the period Jan. 1980-Aug. 1998 and were found to have a better general performance than the corresponding traditional monetary aggregates constructed by the simple-sum of assets. This was so according to the following criteria: a) a better goodness-of-fit coefficient in a regression between the inflation rate and changes in the monetary aggregate; b) a relationship between these two variables which was in most cases closer to proportionality; c) more stable monetary multipliers; and, finally, d) a higher linear correlation coefficient between income velocity and the interest rate.