Nonlinear dynamics in Divisia monetary aggregates: an application of recurrence quantification analysis.

Area of Science:

• Economics
• Financial Stability Analysis
• Time Series Dynamics

Background:

• The Center for Financial Stability (CFS) Divisia monetary aggregates provide a comprehensive measure of money supply.
• Understanding the dynamic properties of monetary aggregates is crucial for economic policy and financial stability.
• The study period (1967-2020) encompasses significant economic events, including the 2007-2009 global financial crisis.

Purpose of the Study:

• To investigate the dynamic properties of U.S. Divisia monetary aggregates using recurrence quantification analysis (RQA).
• To compare the dynamics between narrow and broad Divisia money measures.
• To identify structural breaks and their association with monetary policy and financial innovations.

Main Methods:

• Construction of recurrence plots (RPs) and application of recurrence quantification analysis (RQA).
• Analysis of monthly data for U.S. Divisia monetary aggregates from January 1967 to December 2020.
• Moving window RQA applied to growth rates of narrow and broad Divisia monetary aggregates.

Main Results:

• Evidence of nonlinear dynamics in Divisia monetary aggregates, with a potential for chaotic explanations.
• Identification of an additional drift structure in broad Divisia aggregates around the 2008 global financial crisis.
• Detection of distinct periods of changes in data-generating processes for both narrow and broad aggregates.

Conclusions:

• Divisia monetary aggregates exhibit complex, nonlinear dynamics.
• Structural changes in monetary aggregates are linked to shifts in monetary policy regimes and financial innovations.
• RQA is a valuable tool for uncovering hidden dynamics and structural breaks in financial time series data.