Abstract
We provide a comprehensive reduced-form and structural analysis of evolving macroeconomic dynamics using theoretically founded Divisia money aggregates and a time-series spanning the Great Recession. We fit a Bayesian time-varying parameter VAR model with stochastic volatility to US and UK data from 1979 to 2015. Models using Divisia money growth rates pseudo-forecast GDP growth and inflation with a higher precision than simple-sum aggregates up to a 2-year horizon. Structural variance decompositions reveal that monetary policy shocks during the Great Recession contribute the lion's share of variation in real GDP growth and inflation volatility.
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