Divisia Aggregates: A Literature Review and an Application to the Demand for Money in Paraguay

Abstract

Divisia’s monetary aggregates have been shown to outperform the simple sum monetary aggregates used by policymakers in the vast majority of the world's central banks. Since Barnett (1978, 1980) derived the user cost price and produced the correct theoretical value of the aggregation, Divisa’s monetary aggregates have helped to solve some of the profession's most difficult problems. Therefore, this study calculates Divisa’s monetary aggregates for Paraguay in order to examine its performance against simple-sum monetary aggregates in estimating the demand for money. The results suggest that Divisa’s monetary aggregates are superior to the simple sum aggregates in estimating the demand for money.

JEL classification: E41 ; E43 ; E59 ; E52 ; F30