The Discounted Economic Stock of Money with VAR Forecasting
AbstractWe measure the United States capital stock of money implied by the Divisia monetary aggregate service flow, in a manner consistent with the present-value model of economic capital stock and asset pricing theory. The resulting measures differ substantially from the usual simple sum accounting monetary aggregates. We permit non-martingale expectations and time varying discount rates. Based on Barnett¡¯s (1991) definition of the economic stock of money, we compute the U.S. economic stock of money by discounting to present value the flow of expected expenditure on the services of monetary assets, where expenditure on monetary services is evaluated at the user costs of the monetary components. As a theoretically consistent measure of money stock, our economic stock of money nests Rotemberg, Driscoll, and Poterba¡¯s (1995) currency equivalent index as a special case, under the assumption of martingale expectations. To compute the economic stock of money without imposing martingale expectations, we use forecasts based on the asymmetric vector autoregressive model and the Bayesian vector autoregressive model. We find the resulting capital-stock growth-rate index to be surprisingly robust to the modeling of expectations. Accurate measurement of the economic capital stock of money is relevant to understanding the wealth effects and transmission mechanism of monetary policy.
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Bibliographic InfoPaper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200515.
Length: 41 pages
Date of creation: Aug 2005
Date of revision: Aug 2005
Monetary aggregation; Divisia money aggregate; economic stock of money; user cost of money; currency equivalent index; Bayesian vector autoregression; asymmetric vector; autoregression.;
Other versions of this item:
- William Barnett & John Keating & Unja Chae, 2006. "The Discounted Economic Stock of Money with VAR Forecasting," Annals of Finance, Springer, vol. 2(3), pages 229-258, July.
- William A. Barnett & Unja Chae & John W. Keating, 2006. "The discounted economic stock of money with VAR forecasting," Computing in Economics and Finance 2006 51, Society for Computational Economics.
- William Barnett & Unja Chae & John Keating, 2005. "The Discounted Economic Stock of Money with VAR Forecasting," Macroeconomics 0508021, EconWPA.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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