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Multilateral aggregation-theoretic monetary aggregation over heterogeneous countries

  • Barnett, William A.

We derive fundamental new theory for measuring monetary service flows aggregated over countries within a multicountry economic union. 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. These results are being used by the European Central Bank in the construction of its Divisia monetary aggregates database, with convergence from the most general to the more restrictive approaches expected as economic convergence within the euro area proceeds. Our theory is equally as relevant to other economic unions, with or without a common currency. We use a stochastic approach to aggregation across countries over heterogeneous representative agents. Our theory permits monitoring the effects of policy at the aggregate level over a multicountry economic union, while also monitoring the distribution effects of policy among the countries of the multicountry area. The resulting index number theory assures internal consistency of the data construction methodology with the theory used in applications of the data in modeling and policy.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 136 (2007)
Issue (Month): 2 (February)
Pages: 457-482

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Handle: RePEc:eee:econom:v:136:y:2007:i:2:p:457-482
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Swofford, James L., 2000. "Microeconomic foundations of an optimal currency area," Review of Financial Economics, Elsevier, vol. 9(2), pages 121-128, December.
  2. K. Alec Chrystal & Ronald MacDonald, 1994. "Empirical evidence on the recent behavior and usefulness of simple-sum and weighted measures of the money stock," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 73-109.
  3. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
  4. 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.
  5. Barnett, William A, 1979. "Theoretical Foundations for the Rotterdam Model," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 109-30, January.
  6. David Hendry & Jurgen Doornik, 2000. "Constructing Historical Euro-Zone Data," Economics Series Working Papers 4, University of Oxford, Department of Economics.
  7. Barnett, William A, 1979. "The Joint Allocation of Leisure and Goods Expenditure," Econometrica, Econometric Society, vol. 47(3), pages 539-63, May.
  8. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.
  9. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005.
  10. 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.
  11. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
  12. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  13. W. Erwin Diewert, 2002. "Harmonized Indexes of Consumer Prices: Their Conceptual Foundations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 547-637, December.
  14. Drake, L. & Mullineux, A., 1995. "One Divisa Money for Europe?," Discussion Papers 95-04, Department of Economics, University of Birmingham.
  15. Leigh Drake & Andy Mullineux & Juda Agung, 1997. "One Divisia money for Europe?," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 775-786.
  16. Barnett, William A., 2003. "Aggregation-theoretic monetary aggregation over the euro area, when countries are heterogeneous," Working Paper Series 0260, 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. Katrin Wesche, 1997. "The demand for divisia money in a core monetary union," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 51-60.
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