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The Discounted Economic Stock of Money with VAR Forecasting

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Author Info

  • William Barnett

    (University of Kansas)

  • Unja Chae

    (University of Kansas)

  • John Keating

    (University of Kansas)

Abstract

We 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. 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.

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File URL: http://128.118.178.162/eps/mac/papers/0508/0508021.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0508021.

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Length: 39 pages
Date of creation: 21 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0508021

Note: Type of Document - pdf; pages: 39. A revised version of this paper will appear in the Annals of Finance
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Web page: http://128.118.178.162

Related research

Keywords: monetary aggregation; econommic stock of money; aggregation theory; index number theory; VAR forecasting; wealth effect; Pigou effect; real balance effect; measurement;

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References

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  1. William Barnett & Unja Chae & John Keating, 2005. "Forecast Design in Monetary Capital Stock Measurement," Macroeconomics, EconWPA 0508022, EconWPA.
  2. William A. Barnett & Shu Wu, 2004. "On User Costs of Risky Monetary Assets," Macroeconomics, EconWPA 0406009, EconWPA.
  3. William Barnett, 2005. "Monetary Aggregation," Macroeconomics, EconWPA 0503017, EconWPA.
  4. Keating, John W., 2000. "Macroeconomic Modeling with Asymmetric Vector Autoregressions," Journal of Macroeconomics, Elsevier, vol. 22(1), pages 1-28, January.
  5. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
  6. Rotemberg, Julio J & Driscoll, John C & Poterba, James M, 1995. "Money, Output, and Prices: Evidence from a New Monetary Aggregate," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(1), pages 67-83, January.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  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, Blackwell Publishing, vol. 33(2), pages 272-83, May.
  9. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  10. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics, EconWPA 0511008, EconWPA.
  11. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  12. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
  13. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 47-74, August.
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