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Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries

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  • William Barnett

    (Department of Economics, The University of Kansas)

Abstract

We derive fundamental new theory for measuring monetary service flows aggregated over countries within a multicountry economic union. We develop three increasingly restrictive approaches: (1) the heterogeneous agents approach, (2) the multilateral representative agent approach, and (3) the unilateral representative agent approach. Our heterogeneous agents approach contains our multilateral representative agent approach as a special case. These results are being used by the European Central Bank in the construction of its Divisia monetary aggregates database, with convergence from the most general to the more restrictive approaches expected as economic convergence within the euro area proceeds. Our theory is equally as relevant to other economic unions, with or without a common currency. We use a stochastic approach to aggregation across countries over heterogeneous representative agents. Our theory permits monitoring the effects of policy at the aggregate level over a multicountry economic union, while also monitoring the distribution effects of policy among the countries of the multicountry area. The resulting index number theory assures internal consistency of the data construction methodology with the theory used in applications of the data in modeling and policy.

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200413.

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Length: 30 pages
Date of creation: Nov 2004
Date of revision: Nov 2004
Handle: RePEc:kan:wpaper:200413

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Keywords: Monetary Aggregation; Aggregation over Countries; Heterogeneous Agents; Multilateral Aggregation; EMU.;

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References

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  1. K. Alec Chrystal & Ronald MacDonald, 1994. "Empirical evidence on the recent behavior and usefulness of simple-sum and weighted measures of the money stock," Proceedings, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 73-109.
  2. Barnett, William A, 1979. "The Joint Allocation of Leisure and Goods Expenditure," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 539-63, May.
  3. William A. Barnett & Shu Wu, 2005. "On user costs of risky monetary assets," Annals of Finance, Springer, Springer, vol. 1(1), pages 35-50, 01.
  4. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, Elsevier, vol. 1(2), pages 145-149.
  5. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series, European Central Bank 0079, European Central Bank.
  6. Drake, L. & Mullineux, A., 1995. "One Divisa Money for Europe?," Discussion Papers, Department of Economics, University of Birmingham 95-04, Department of Economics, University of Birmingham.
  7. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 200510, University of Kansas, Department of Economics, revised Mar 2005.
  8. Barnett, William A, 1979. "Theoretical Foundations for the Rotterdam Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 46(1), pages 109-30, January.
  9. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, Elsevier, vol. 14(1), pages 11-48, September.
  10. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics, EconWPA 0511008, EconWPA.
  11. William A. Barnett, 2003. "Aggregation-Theoretic Monetary Aggregation over the Euro Area, when Countries are Heterogeneous," Macroeconomics, EconWPA 0309018, EconWPA.
  12. Spencer, Peter, 1997. "Monetary integration and currency substitution in the EMS: The case for a European monetary aggregate," European Economic Review, Elsevier, Elsevier, vol. 41(7), pages 1403-1419, July.
  13. Diewert, Erwin, 2002. "Harmonized indexes of consumer prices: their conceptual foundations," Working Paper Series, European Central Bank 0130, European Central Bank.
  14. Katrin Wesche, 1997. "The demand for divisia money in a core monetary union," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 51-60.
  15. Beyer, A. & Doornik, J.A. & Hendry, D.F., 2000. "Constructing Historical Euro-Zone Data," Economics Working Papers, European University Institute eco2000/10, European University Institute.
  16. Leigh Drake & Andy Mullineux & Juda Agung, 1997. "One Divisia money for Europe?," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 29(6), pages 775-786.
  17. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank, Research Centre.
  18. Swofford, James L., 2000. "Microeconomic foundations of an optimal currency area," Review of Financial Economics, Elsevier, Elsevier, vol. 9(2), pages 121-128, December.
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Cited by:
  1. William Barnett & Marcelle Chauvet, 2008. "International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 200804, University of Kansas, Department of Economics, revised Sep 2008.
  2. Barnett, William A. & Chauvet, Marcelle & Tierney, Heather L. R., 2007. "Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach," MPRA Paper 10150, University Library of Munich, Germany, revised 06 Aug 2008.
  3. Barnett, William A. & Chauvet, Marcelle, 2008. "The End of the Great Moderation: “We told you so.”," MPRA Paper 11642, University Library of Munich, Germany.
  4. Richard G. Anderson & Barry Jones, 2011. "A comprehensive revision of the U.S. monetary services (divisia) indexes," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 325-360.
  5. Calza, Alessandro & Zaghini, Andrea, 2009. "Nonlinearities In The Dynamics Of The Euro Area Demand For M1," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(01), pages 1-19, February.
  6. William A. Barnett & Marcelle Chauvet, 2010. "How Better Monetary Statistics Could Have Signaled the Financial Crisis," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 201005, University of Kansas, Department of Economics, revised Aug 2010.
  7. William Barnett & Unja Chae & John Keating, 2005. "Forecast Design in Monetary Capital Stock Measurement," Macroeconomics, EconWPA 0508022, EconWPA.
  8. Alkhareif, Ryadh & Barnett, William A., 2012. "Divisia monetary aggregates for the GCC countries," MPRA Paper 39539, University Library of Munich, Germany.

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