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Measurement Error In Monetary Aggregates: A Markov Switching Factor Approach

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  • Barnett, William A.
  • Chauvet, Marcelle
  • Tierney, Heather L. R.

Abstract

This paper compares the different dynamics of the simple-sum monetary aggregates and the Divisia monetary aggregate indices over time, over the business cycle, and across high and low inflation and interest-rate phases. Although traditional comparisons of the series sometimes suggest that simple-sum and Divisia monetary aggregates share similar dynamics, there are important differences around turning points that cannot be evaluated by their average behavior. We use a factor model with a regime-switching model that separates the common movements underlying the monetary aggregate indices from idiosyncratic variations in each series. We find that the major differences between the simple-sum aggregates and Divisia indices occur around the beginnings and ends of recessions and during some high-interest-rate phases. We note the inferences' policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia [Journal of Political Economy, 104 (5) (1996), 1065–1083] has observed in this regard, “measurement matters.â€

Suggested Citation

  • Barnett, William A. & Chauvet, Marcelle & Tierney, Heather L. R., 2009. "Measurement Error In Monetary Aggregates: A Markov Switching Factor Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S2), pages 381-412, September.
  • Handle: RePEc:cup:macdyn:v:13:y:2009:i:s2:p:381-412_09
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    References listed on IDEAS

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    1. William A. Barnett, 2011. "Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, volume 2, chapter 6, pages 167-206, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Ryan S. Mattson & Philippe de Peretti, 2014. "Investigating the Role of Real Divisia Money in Persistence-Robust Econometric Models," Working Papers hal-00984827, HAL.
    2. Barnett, William A. & Erwin Diewert, W. & Zellner, Arnold, 2011. "Introduction to measurement with theory," Journal of Econometrics, Elsevier, vol. 161(1), pages 1-5, March.
    3. William A. Barnett & Marcelle Chauvet, 2011. "International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, volume 2, chapter 1, pages 1-51, World Scientific Publishing Co. Pte. Ltd..
    4. Jawadi, Fredj & Sousa, Ricardo M., 2013. "Money demand in the euro area, the US and the UK: Assessing the role of nonlinearity," Economic Modelling, Elsevier, vol. 32(C), pages 507-515.
    5. Ellington, Michael, 2018. "The case for Divisia monetary statistics: A Bayesian time-varying approach," Journal of Economic Dynamics and Control, Elsevier, vol. 96(C), pages 26-41.
    6. Barnett, William A. & Chauvet, Marcelle, 2011. "How better monetary statistics could have signaled the financial crisis," Journal of Econometrics, Elsevier, vol. 161(1), pages 6-23, March.
    7. Fleissig, Adrian R. & Jones, Barry E., 2015. "The impact of commercial sweeping on the demand for monetary assets during the Great Recession," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 412-422.
    8. Hachmi Ben Ameur & Fredj Jawadi & Abdoulkarim Idi Cheffou & Wael Louhichi, 2018. "Measurement errors in stock markets," Annals of Operations Research, Springer, vol. 262(2), pages 287-306, March.
    9. Barnett, William A. & Chauvet, Marcelle, 2008. "The End of the Great Moderation: “We told you so.”," MPRA Paper 11642, University Library of Munich, Germany.
    10. Chin-Hong, Puah & Lee-Chea, Hiew, 2010. "Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia," MPRA Paper 31731, University Library of Munich, Germany.
    11. Richard G. Anderson & Marcelle Chauvet & Barry Jones, 2015. "Nonlinear Relationship Between Permanent and Transitory Components of Monetary Aggregates and the Economy," Econometric Reviews, Taylor & Francis Journals, vol. 34(1-2), pages 228-254, February.
    12. Fredj Jawadi & Ricardo M. Sousa, 2012. "Consumption and Wealth in the US, the UK and the Euro Area:A Nonlinear Investigation," NIPE Working Papers 24/2012, NIPE - Universidade do Minho.

    More about this item

    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

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