Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153138
Authors: 
Jones, Barry E.
Stracca, Livio
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 704
Abstract: 
We propose a numerical test of the non-parametric conditions for additive separability between consumption and real money balances, building on Varian (1983). If additive separability is rejected, then real balances enter into the theoretical IS curve. We test whether or not monetary assets and consumption are additively separable for the euro area using quarterly data from 1991 to 2005. Previous results using a parametric approach suggest that real balances can be excluded from the IS curve. We find that additive separability is violated over this sample period. After 1992, however, violations involve only a few observations and are in some instances related to measurement problems in the data. Overall, our results tend to support the claim that perfect non-separability between consumption and real balances is implausible, but that non-separabilities may not be very important empirically. At the same time, we reject additive separability throughout if we extend the sample period back to the 1980s, a period characterised by higher volatility in inflation and money growth.
Subjects: 
Additive Separability
IS Curve
Money
Non-parametric testing
Revealed Preference
JEL: 
C14
C63
E41
Document Type: 
Working Paper

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