SIMPLE SUM VERSUS DIVISIA MONETARY AGGREGATES: AN EMPIRICAL EVALUATION
This paper seeks to establish the superiority of the Divisia monetary aggregates over their Simple sum counterparts in India. The aggregates are constructed over weakly separable groups obtained from a nonparametric test of separability considering four assets viz, (I) currency with the public, (ii) net demand deposits with the banks, (iii) net time deposits with the banks and (iv) post office savings deposits. The analysis covers two different samples – one annual (1970 – 1996) and the other monthly 1985:04 – 1996:09). The comparative performance of the Divisia aggregates in relation to the Simple sum aggregates is evaluated with the help of three tests viz., money demand stability, information content and Davidson-Mackinnon J-tests. The results of the study show that the Divisia aggregates have an edge over their simple sum counterparts. Further, the results of an extended analysis covering a new asset viz., the certificate of deposit, also exhibit a similar trend for the monthly period: 1994:06 – 1996:07.