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The Exact Theoretical Rational Expectations Monetary Aggregate

In: Financial Aggregation And Index Number Theory

Author

Listed:
  • William A. Barnett

    (University of Kansas, USA)

  • Melvin J. Hinich
  • Piyu Yue

Abstract

In aggregation theory, index numbers are judged relative to their ability to track the exact aggregator functions nested within the economy's structure. Within the monetary sector, Barnett, Liu, and Jensen (1997) compared two statistical index numbers: the Divisia monetary aggregate and the simple sum monetary aggregate. They produced those comparisons using simulated data. In this paper, we again compare those two statistical index numbers with the exact rational expectations monetary aggregate, but we use actual data. Since we are not using simulated data, we estimate the parameters of the Euler equations and thereby of the nested monetary aggregator function using generalized method of moments. We explore the tracking errors of the two index numbers relative to the estimated exact aggregate. We investigate the circumstances under which risk aversion increases tracking error. We also use polyspectral methods to test for the existence of remaining nonlinear structure in the residual tracking errors.

Suggested Citation

  • William A. Barnett & Melvin J. Hinich & Piyu Yue, 2011. "The Exact Theoretical Rational Expectations Monetary Aggregate," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, chapter 2, pages 53-84, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814293105_0002
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    Cited by:

    1. is not listed on IDEAS
    2. William A. Barnett & Marcelle Chauvet & Heather L. R. Tierney, 2011. "Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, chapter 7, pages 207-249, World Scientific Publishing Co. Pte. Ltd..
    3. Michael T. Belongia, 1992. "Selecting an intermediate target variable for monetary policy when the goal is price stability," Working Papers 1992-008, Federal Reserve Bank of St. Louis.
    4. William A. Barnett & Shu Wu, 2011. "On User Costs of Risky Monetary Assets," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, chapter 3, pages 85-105, World Scientific Publishing Co. Pte. Ltd..
    5. William Barnett & Shu Wu, 2004. "Intertemporally non-separable monetary-asset risk adjustment and aggregation," Economics Bulletin, AccessEcon, vol. 5(13), pages 1-9.
    6. repec:ebl:ecbull:v:5:y:2004:i:13:p:1-9 is not listed on IDEAS
    7. William A Barnett & Unja Chae & John W Keating, 2012. "Forecast Design In Monetary Capital Stock Measurement," Global Journal of Economics (GJE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-53.
    8. Binner, Jane & Elger, Thomas, 2002. "The UK Personal Sector Demand for Risky Money," Working Papers 2002:9, Lund University, Department of Economics.
    9. Binner, Jane & Elger, Thomas & de Peretti, Philipe, 2002. "Is UK Risky Money Weakly Separable? A Stochastic Approach," Working Papers 2002:13, Lund University, Department of Economics.
    10. Travis D. Nesmith, 2024. "Revisiting Risky Money," Finance and Economics Discussion Series 2024-090, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

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    JEL classification:

    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • G1 - Financial Economics - - General Financial Markets

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