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Financial Firm Production of Inside Monetary and Credit Card Services: An Aggregation Theoretic Approach

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  • Barnett, William
  • Su, Liting

Abstract

A monetary-production model of financial firms is employed to investigate supply-side monetary aggregation, augmented to include credit card transaction services. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) have derived and applied the relevant aggregation theory applicable to measuring the demand for the joint services of money and credit cards. But because of the existence of required reserves and differences in taxation on the demand and supply side, there is a regulatory wedge between the demand and supply of monetary services. We derive theory needed to measure the supply of the joint services of credit cards and money, to estimate the output supply function, and to compute value added. The resulting model can be used to investigate the transmission mechanism of monetary policy. Earlier results on the monetary policy transmission mechanism based on the correlation between simple sum inside money and final targets are not likely to approximate or even be relevant to results that can be acquired by empirical implementation of this model or its extensions. Our financial-firm value-added measure and its supply function are fundamentally different from prior measures of inside money, shadow banking output, or money supply functions. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability (CFS) in New York City. We show that the now discredited conventional accounting-based measures of privately produced inside money can be replaced by our measures, based on microeconomic aggregation theory, to provide the information originally contemplated in the literature on monetary theory for over a century.

Suggested Citation

  • Barnett, William & Su, Liting, 2017. "Financial Firm Production of Inside Monetary and Credit Card Services: An Aggregation Theoretic Approach," MPRA Paper 82061, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:82061
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    References listed on IDEAS

    as
    1. Barnett, William A. & Su, Liting, 2019. "Risk Adjustment Of The Credit-Card Augmented Divisia Monetary Aggregates," Macroeconomic Dynamics, Cambridge University Press, vol. 23(S1), pages 90-114, September.
    2. 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.
    3. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, University Library of Munich, Germany.
    4. Barnett, William & Chauvet, Marcelle & Leiva-Leon, Danilo & Su, Liting, 2016. "Nowcasting nominal gdp with the credit-card augmented Divisia monetary aggregates," MPRA Paper 73246, University Library of Munich, Germany.
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    More about this item

    Keywords

    Inside money; aggregation theory; index number theory; financial firm production;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D2 - Microeconomics - - Production and Organizations
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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