UK household-sector money demand and Divisia monetary aggregates in the new millennium

We estimate elasticities of substitution between components of the Bank of England's household-sector UK Divisia monetary aggregate using quarterly data from 1999 to 2019, encompassing the period surrounding the global financial crisis. The demand system includes interest-bearing sight and time deposits at monetary financial institutions as components, since deposit data for banks (excluding mutuals) and for mutuals are no longer published separately. We find that the elasticities of substitution that relate to changes in the user cost of noninterest-bearing monetary assets imply inelastic substitution over all or almost all of the sample and, consequently, a conventional monetary aggregate would be a highly misleading economic indicator relative to a Divisia monetary aggregate.