| The current Bank of Canada monetary aggregation technique of simple-summation over arbitrary financial components has recently drawn criticism due to its lack of microtheoretic grounding. We evaluate these issues in a demand systems framework whereby we apply the Gorman-Strotz two-stage optimization model for a representative economic agent who derives utility from holding monetary assets. After constructing the monetary aggregates M1, M2 less M1 and M3 less M2 via the Divisia index we estimate the homothetic translog flexible functional form for the indirect utility function. This structure allows us to estimate the own and cross-price elasticities, the Allen-Uzawa and Morishima, elasticities of substitution and test for weak separability. Complementarity relationships between the aggregates were evident and support for further aggregation of M1 and M2 less M1 was obtained. Time series tests for unit roots indicated nonstationarity in the variables but no evidence of cointegration was apparent. |
