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Forecast Design in Monetary Capital Stock Measurement

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Author Info

  • William Barnett

    (University of Kansas)

  • Unja Chae

    (University of Kansas)

  • John Keating

    (University of Kansas)

Abstract

We design a procedure for measuring 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 define a procedure for producing the necessary forecasts based on an asymmetric vector autoregressive model and a Bayesian vector autoregressive model. In application of this proposed procedure, Barnett, Chae, and Keating (2005) find the resulting capital-stock growth-rate index to be surprisingly robust to the modeling of expectations. Similarly the primary conclusions of this supporting paper regard robustness. We believe that further experiments with other forecasting models would further confirm our robustness conclusion. Different forecasting models can produce substantial differences in forecasts into the distant future. But since the distant future is heavily discounted in our stock formula, and since alternative forecasting formulas rarely produce dramatic differences in short term forecasts, we believe that our robustness result obviates prior concerns about the dependency of theoretical monetary capital stock computations upon forecasts of future expected flows. Even the simple martingale forecast, which has no unknown parameters and is easily computed with current period data, produces a discounted stock measure that is adequate for most purposes. Determining an easily measured extended index that can remove the small bias that we identify under the martingale forecast remains a subject for our future research. At the time that Milton Friedman (1969) was at the University of Chicago, the “Chicago School” view on the monetary transmission mechanism was based upon the wealth effect, called the “real balance effect” or “Pigou (1943) effect,” of open market operations. Our research identifies very large errors in the wealth effects computed from the conventional simple sum monetary aggregates and makes substantial progress in the direction of accurate measurement of monetary-policy wealth effects.

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File URL: http://128.118.178.162/eps/mac/papers/0508/0508022.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0508022.

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Length: 68 pages
Date of creation: 21 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0508022

Note: Type of Document - pdf; pages: 68. This paper provides the details of the forecast design used in our forthcoming Annals of Finance paper, which is in this archive in an earlier version as: ewp- mac/0508021.
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Web page: http://128.118.178.162

Related research

Keywords: Monetary aggregation; Divisia money aggregate; economic stock of money; user cost of money; currency equivalent index; Bayesian vector autoregression; asymmetric vector autoregression.;

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References

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  1. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-93, September.
  2. Barnett, William A., 2007. "Multilateral aggregation-theoretic monetary aggregation over heterogeneous countries," Journal of Econometrics, Elsevier, vol. 136(2), pages 457-482, February.
  3. Chetty, V K, 1972. "On Measuring the Nearness of Near-Moneys: Reply," American Economic Review, American Economic Association, vol. 62(1), pages 226-29, March.
  4. William Barnett & Shu Wu, 2004. "On user costs of risy monetary assets," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200404, University of Kansas, Department of Economics, revised Jun 2004.
  5. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  6. William Barnett & Melvin J. Hinich & Piyu Yue, 2012. "The Exact Theoretical Rational Expectations Monetary Aggregate," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201229, University of Kansas, Department of Economics, revised Sep 2012.
  7. Chetty, V Karuppan, 1969. "On Measuring the Nearness of the Near-Moneys," American Economic Review, American Economic Association, vol. 59(3), pages 270-81, June.
  8. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
  9. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
  10. repec:cup:macdyn:v:4:y:2000:i:2:p:197-221 is not listed on IDEAS
  11. 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, vol. 13(1), pages 67-83, January.
  12. William Barnett & Unja Chae & John Keating, 2005. "The Discounted Economic Stock of Money with VAR Forecasting," Macroeconomics 0508021, EconWPA.
  13. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, EconWPA.
  14. 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.
  15. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  16. 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.
  17. Steinhauer, Larry & Chang, John, 1972. "On Measuring the Nearness of Near-Moneys: Comment," American Economic Review, American Economic Association, vol. 62(1), pages 221-25, March.
  18. 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.
  19. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  20. Joseph Bisignano, 1974. "Real money substitutes," Working Papers in Applied Economic Theory 17, Federal Reserve Bank of San Francisco.
  21. Peter N. Ireland, 2001. "The Real Balance Effect," NBER Working Papers 8136, National Bureau of Economic Research, Inc.
  22. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
  23. Keating, John W., 2000. "Macroeconomic Modeling with Asymmetric Vector Autoregressions," Journal of Macroeconomics, Elsevier, vol. 22(1), pages 1-28, January.
  24. Klein, Benjamin, 1974. "Competitive Interest Payments on Bank Deposits and the Long-Run Demand for Money," American Economic Review, American Economic Association, vol. 64(6), pages 931-49, December.
  25. 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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Cited by:
  1. 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.
  2. Kelly, Logan, 2007. "Measuring the Economic Stock of Money," MPRA Paper 4914, University Library of Munich, Germany.

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