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Measurement Error In Monetary Aggregates: A Markov Switching Factor Approach

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Author Info
Barnett, William A.
Chauvet, Marcelle
Tierney, Heather L. R.

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Abstract

This paper compares the different dynamics of the simple-sum monetary aggregates and the Divisia monetary aggregate indices over time, over the business cycle, and across high and low inflation and interest-rate phases. Although traditional comparisons of the series sometimes suggest that simple-sum and Divisia monetary aggregates share similar dynamics, there are important differences around turning points that cannot be evaluated by their average behavior. We use a factor model with a regime-switching model that separates the common movements underlying the monetary aggregate indices from idiosyncratic variations in each series. We find that the major differences between the simple-sum aggregates and Divisia indices occur around the beginnings and ends of recessions and during some high-interest-rate phases. We note the inferences' policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia [Journal of Political Economy, 104 (5) (1996), 1065 measurement matters.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 13 (2009)
Issue (Month): S2 (September)
Pages: 381-412
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:macdyn:v:13:y:2009:i:s2:p:381-412_09

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Barnett, William A. & Liu, Yi & Jensen, Mark, 1997. "Capm Risk Adjustment For Exact Aggregation Over Financial Assets," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 485-512, June. [Downloadable!]
  2. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005. [Downloadable!]
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  3. Barnett, William A., 2007. "Multilateral aggregation-theoretic monetary aggregation over heterogeneous countries," Journal of Econometrics, Elsevier, vol. 136(2), pages 457-482, February. [Downloadable!] (restricted)
    Other versions:
  4. repec:cup:macdyn:v:4:y:2000:i:2:p:197-221 is not listed on IDEAS
  5. Schunk, Donald L, 2001. "The Relative Forecasting Performance of the Divisia and Simple Sum Monetary Aggregates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 272-83, May.
  6. William A. Barnett & Shu Wu, 2005. "On user costs of risky monetary assets," Annals of Finance, Springer, vol. 1(1), pages 35-50, 01. [Downloadable!] (restricted)
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  7. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  8. Belongia, Michael T. & Ireland, Peter N., 2006. "The Own-Price of Money and the Channels of Monetary Transmission," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 429-445, March. [Downloadable!] (restricted)
  9. Barnett, William A. & Ronald Gallant, A. & Hinich, Melvin J. & Jungeilges, Jochen A. & Kaplan, Daniel T. & Jensen, Mark J., 1995. "Robustness of nonlinearity and chaos tests to measurement error, inference method, and sample size," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 301-320, July. [Downloadable!] (restricted)
  10. Barnett, William A. & Hinich, Melvin J. & Yue, Piyu, 2000. "The Exact Theoretical Rational Expectations Monetary Aggregate," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 197-221, June. [Downloadable!]
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  11. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-96, November.
  12. William A. Barnett & Melvin Hinich & Piyu Yue, 1989. "Monitoring monetary aggregates under risk aversion," Proceedings, Federal Reserve Bank of St. Louis, pages 189-245.
  13. Belongia, Michael T, 1996. "Measurement Matters: Recent Results from Monetary Economics Reexamined," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1065-83, October. [Downloadable!] (restricted)
  14. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  15. W. A. Broock & J. A. Scheinkman & W. D. Dechert & B. LeBaron, 1996. "A test for independence based on the correlation dimension," Econometric Reviews, Taylor and Francis Journals, vol. 15(3), pages 197-235. [Downloadable!] (restricted)
  16. Jones, Barry E. & Dutkowsky, Donald H. & Elger, Thomas, 2005. "Sweep programs and optimal monetary aggregation," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 483-508, February. [Downloadable!] (restricted)
  17. Barnett, William A, 1982. "The Optimal Level of Monetary Aggregation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 687-710, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Barnett, William A. & Chauvet, Marcelle, 2008. "International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview," MPRA Paper 10242, University Library of Munich, Germany, revised 04 Sep 2008. [Downloadable!]
    Other versions:
  2. Barnett, William A. & Chauvet, Marcelle, 2008. "The End of the Great Moderation?," MPRA Paper 11642, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. William Barnett & W. Erwin Diewert & Arnold Zellner, 2009. "Introduction to Measurement with Theory," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200906, University of Kansas, Department of Economics, revised Apr 2009. [Downloadable!]
    Other versions:
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