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International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview

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Author Info
William Barnett (Department of Economics, The University of Kansas)
Marcelle Chauvet (University of California at Riverside)

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Abstract

This paper comprises a survey of a half century of research on international monetary aggregate data. We argue that since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” and have produced decades of misunderstandings in international monetary economics research and policy. While better data, based correctly on index number theory and aggregation theory, now exist, the official central bank data most commonly used have not improved in most parts of the world. While aggregation theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. No other area of economics has been so seriously damaged by data unrelated to valid index number and aggregation theory. In this paper we chronologically review the past research in this area and connect the data errors with the resulting policy and inference errors. Future research on monetary aggregation and policy can most advantageously focus on extensions to exchange rate risk and its implications for multilateral aggregation over monetary asset portfolios containing assets denominated in more than one currency. The relevant theory for multilateral aggregation with exchange rate risk has been derived by Barnett (2007) and Barnett and Wu (2005).

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Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200804.

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Length: 60 pages
Date of creation: Sep 2008
Date of revision: Sep 2008
Handle: RePEc:kan:wpaper:200804

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Related research
Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; monetary policy; index number theory; exchange rate risk; multilateral aggregation; open economy monetary economics.;

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Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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References listed on IDEAS
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. Barnett, William A. & Chauvet, Marcelle & Tierney, Heather L. R., 2007. "Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach," MPRA Paper 5770, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005. [Downloadable!]
    Other versions:
  4. 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)
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  5. McCallum, Bennett T., 1999. "An Interview With Robert E. Lucas, Jr," Macroeconomic Dynamics, Cambridge University Press, vol. 3(02), pages 278-291, June. [Downloadable!]
  6. Van Hoa, Tran, 1985. "A divisia system approach to modelling monetary aggregates," Economics Letters, Elsevier, vol. 17(4), pages 365-368. [Downloadable!] (restricted)
  7. Belongia, Michael T & Chrystal, K Alec, 1991. "An Admissible Monetary Aggregate for the United Kingdom," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 497-503, August. [Downloadable!] (restricted)
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  8. 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.
  9. Barnett, William A & Hahm, Jeong Ho, 1994. "Financial-Firm Production of Monetary Services: A Generalized Symmetric Barnett Variable-Profit-Function Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(1), pages 33-46, January.
  10. Swamy, P. A. V. B. & Tinsley, P. A., 1980. "Linear prediction and estimation methods for regression models with stationary stochastic coefficients," Journal of Econometrics, Elsevier, vol. 12(2), pages 103-142, February. [Downloadable!] (restricted)
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  11. 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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  12. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  13. 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)
  14. Piyu Yue & Robert Fluri, 1991. "Divisia monetary services indexes for Switzerland: are they useful for monetary targeting?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 19-33. [Downloadable!]
  15. Barnett, William A & Fisher, Douglas & Serletis, Apostolos, 1992. "Consumer Theory and the Demand for Money," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 2086-2119, December. [Downloadable!] (restricted)
  16. 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.
  17. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
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  19. 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)
  20. Barnett, William A, 1997. "Which Road Leads to Stable Money Demand?," Economic Journal, Royal Economic Society, vol. 107(443), pages 1171-85, July. [Downloadable!] (restricted)
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  21. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  22. Drake, Leigh, 1992. "The Substitutability of Financial Assets in the U.K. and the Implications for Monetary Aggregation," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 60(3), pages 221-48, September.
  23. Barnett, William A & Offenbacher, Edward K & Spindt, Paul A, 1984. "The New Divisia Monetary Aggregates," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1049-85, December. [Downloadable!] (restricted)
  24. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1973-3), pages 577-646. [Downloadable!]
  25. 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)
  26. 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)
  27. Barnett, William A. & Hinich, Melvin J. & Weber, Warren E., 1986. "The regulatory wedge between the demand-side and supply-side aggregation-theoretic monetary aggregates," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 165-185. [Downloadable!] (restricted)
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Cited by:
(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. "The End of the Great Moderation?," MPRA Paper 11642, University Library of Munich, Germany. [Downloadable!]
    Other versions:
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