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Forecast Design In Monetary Capital Stock Measurement



    (University of Kansas, USA)



    (Intel Corporation, USA)



    (University of Kansas, USA)

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 US 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 this and a companion paper (Barnett, Chae, and Keating, 2006), we find the resulting capital-stock growth-rate index to be surprisingly robust to the modeling of expectations. The primary conclusions regard robustness. It is not our intention to advocate any particular approach to modeling future expectations.We believe that further experiments with other forecasting models would 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 dependence 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 extended index, which 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. Prior experience with monetary policy errors produced from monetary-aggregate-measurement errors suggests possible formidable policy relevance.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Global Journal of Economics.

Volume (Year): 01 (2012)
Issue (Month): 01 ()
Pages: 1250005-1-1250005-53

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Handle: RePEc:wsi:gjexxx:v:01:y:2012:i:01:p:1250005-1-1250005-53
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  1. 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.
  2. 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.
  3. Rotemberg, J.J. & Driscoll, J.C. & Poterba, J.M., 1991. "Money, Output, and Prices: Evidence from a New Monetary Aggregate," Working papers 585, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Barnett, William A., 1978. "The user cost of money," Economics Letters, Elsevier, vol. 1(2), pages 145-149.
  5. 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.
  6. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, EconWPA.
  7. 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.
  8. Barnett, William A. & Hinich, Melvin J. & Yue, Piyu, 2000. "The Exact Theoretical Rational Expectations Monetary Aggregate," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 197-221, June.
  9. William Barnett & Unja Chae & John Keating, 2005. "The Discounted Economic Stock of Money with VAR Forecasting," Macroeconomics 0508021, EconWPA.
  10. Barnett, William A., 2007. "Multilateral aggregation-theoretic monetary aggregation over heterogeneous countries," Journal of Econometrics, Elsevier, vol. 136(2), pages 457-482, February.
  11. 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.
  12. Moroney, John R & Wilbratte, Barry J, 1978. "Money and Money Substitutes: A Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(1), pages 115-16, February.
  13. Peter N. Ireland, 2001. "The Real Balance Effect," Boston College Working Papers in Economics 491, Boston College Department of Economics.
  14. Donal J. Donovan, 1978. "Modeling the Demand for Liquid Assets: An Application to Canada (Etablissement d'un modèle de demande d'actifs liquides: application au Canada) (Construcción de un modelo de demanda de activos líqu," IMF Staff Papers, Palgrave Macmillan, vol. 25(4), pages 676-704, December.
  15. William A. Barnett & Shu Wu, 2004. "On User Costs of Risky Monetary Assets," Macroeconomics 0406009, EconWPA.
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  17. Joseph Bisignano, 1974. "Real money substitutes," Working Papers in Applied Economic Theory 17, Federal Reserve Bank of San Francisco.
  18. 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.
  19. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  20. 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.
  21. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1, July.
  22. 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.
  23. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  24. Keating, John W., 2000. "Macroeconomic Modeling with Asymmetric Vector Autoregressions," Journal of Macroeconomics, Elsevier, vol. 22(1), pages 1-28, January.
  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.
  26. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  27. 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.
  28. 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.
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