Abstract
This paper examines the stability of holdings of Divisia money balances by UK households using step and impulse indicators. An error feedback equation for money demand is estimated that includes 5 step dummies and 6 impulse dummies. For comparison an error correction model for the traditional M4 aggregate is also estimated that includes 9 steps and 5 impulse dummies. Steps in 1983 and 1990 are common to both aggregates. Steps in 1992, 2012 and 2015 only affect the Divisia aggregate. The step in 2012 corresponds to the Bank of England’s second round of quantitative easing. The Divisia aggregate appears to be a useful guide for policy, especially when the policy rate is close to the zero lower bound.
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