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Aggregation-Theoretic Monetary Aggregation over the Euro Area, when Countries are Heterogeneous

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  • William A. Barnett

    (University of Kansas)

Abstract

We derive fundamental new theory for measuring monetary service flows aggregated over countries within the European Monetary Union (EMU). 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. In our most general approach, we assume the existence of a representative consumer within each country to aggregate within each country. We use a stochastic approach to aggregation across countries over the heterogeneous representative agents, and we derive the resulting formulas for stochastic aggregation over countries. Our theory permits monitoring the effects of policy at the aggregate level over the euro area, while also monitoring the distribution effects of policy among the countries of the euro area. Our approach requires the simultaneous use of two inflation indexes over the euro area.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0309018.

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Date of creation: 24 Sep 2003
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Handle: RePEc:wpa:wuwpma:0309018

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Web page: http://128.118.178.162

Related research

Keywords: multilateral aggregation; Divisia monetary aggregates; ECB; EMU; Euro area; aggregation over countries; heterogeneous agents; distribution effects;

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  1. Barnett, William A, 1979. "The Joint Allocation of Leisure and Goods Expenditure," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 539-63, May.
  2. Barnett, William A, 1979. "Theoretical Foundations for the Rotterdam Model," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 109-30, January.
  3. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
  4. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005.
  5. Diewert, Erwin, 2002. "Harmonized indexes of consumer prices: their conceptual foundations," Working Paper Series 0130, 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. Beyer, A. & Doornik, J.A. & Hendry, D.F., 2000. "Constructing Historical Euro-Zone Data," Economics Working Papers eco2000/10, European University Institute.
  8. Leigh Drake & Andy Mullineux & Juda Agung, 1997. "One Divisia money for Europe?," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 775-786.
  9. Samuelson, Paul A & Sato, Ryuzo, 1984. "Unattainability of Integrability and Definiteness Conditions in the General Case of Demand for Money and Goods," American Economic Review, American Economic Association, vol. 74(4), pages 588-604, September.
  10. Spencer, Peter, 1997. "Monetary integration and currency substitution in the EMS: The case for a European monetary aggregate," European Economic Review, Elsevier, vol. 41(7), pages 1403-1419, July.
  11. Richard G. Anderson, 2006. "Monetary base," Working Papers 2006-049, Federal Reserve Bank of St. Louis.
  12. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  13. W. Erwin Diewert, 1980. "Aggregation Problems in the Measurement of Capital," NBER Chapters, in: The Measurement of Capital, pages 433-538 National Bureau of Economic Research, Inc.
  14. Richard G. Anderson & Barry Jones & Travis Nesmith, 1996. "Monetary aggregation theory and statistical index numbers," Working Papers 1996-007, Federal Reserve Bank of St. Louis.
  15. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  16. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.
  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. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics, EconWPA 0511008, EconWPA.
  19. Swofford, James L., 2000. "Microeconomic foundations of an optimal currency area," Review of Financial Economics, Elsevier, vol. 9(2), pages 121-128, December.
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Citations

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Cited by:
  1. Richard G. Anderson & Barry Jones, 2011. "A comprehensive revision of the U.S. monetary services (divisia) indexes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 325-360.
  2. William Barnett & Shu Wu, 2004. "Intertemporally non-separable monetary-asset risk adjustment and aggregation," Economics Bulletin, AccessEcon, vol. 5(13), pages 1-9.
  3. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
  4. Jones, Barry E. & Fleissig, Adrian R. & Elger, Thomas & Dutkowsky, Donald H., 2008. "Monetary policy and monetary asset substitution," Economics Letters, Elsevier, vol. 99(1), pages 18-22, April.
  5. Barnett, William A., 2007. "Multilateral aggregation-theoretic monetary aggregation over heterogeneous countries," Journal of Econometrics, Elsevier, vol. 136(2), pages 457-482, February.
  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.
  7. Calza, Alessandro & Zaghini, Andrea, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series 0592, European Central Bank.
  8. Swofford, James L., 2008. "Tests of microeconomic foundations of Asian common currency areas," Journal of Asian Economics, Elsevier, vol. 19(3), pages 254-258, June.
  9. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
  10. repec:ebl:ecbull:v:5:y:2004:i:13:p:1-9 is not listed on IDEAS

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