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Effects of Measurement on Inferences: An Application to Money Demand and Related Variables in the United States

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  • Al-Sharkas, A.A.

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  • Lozi, B.M.
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    Abstract

    This paper examines the impact of the choice of a money stock measure on the inference about monetary shocks. To this end, it adopts order-invariant forecast error variance decompositions (FEVD) for an unrestricted vector autoregressive (UVAR) model. This approach does not require orthogonalization of shocks and is invariant to the ordering of the variables in the UVAR. The empirical work is based on estimating UVAR model using different methods of measurement of monetary asset. The results suggest that empirical conclusions from the FEVD analyses differ when money is measured by the flow of monetary services rather than by summation of the dollar amount of monetary asset. Further, the results show that qualitative inference about the money’s effects on the economic activity can depend crucially on the definition of money chosen.

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    Bibliographic Info

    Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

    Volume (Year): 9 (2009)
    Issue (Month): 1 ()
    Pages:

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    Handle: RePEc:eaa:aeinde:v:9:y:2009:i:1_8

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    Related research

    Keywords: Money; Monetary Policy; VAR.;

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    1. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
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    3. 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.
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    12. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    13. Spencer, David E, 1989. "Does Money Matter? The Robustness of Evidence from Vector Autoregressions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 442-54, November.
    14. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
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